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GS Goldman Sachs

Filed: 3 May 21, 8:00pm
0000886982 gs:LoansReceivableAndRelatedLendingCommitmentsMember gs:OtherMetricsUnratedMember us-gaap:CreditCardReceivablesMember gs:InternallyRatedLoansMember 2020-12-31 0000886982 us-gaap:CommodityContractMember srt:NaturalGasReservesMember us-gaap:FairValueInputsLevel3Member gs:MeasurementInputSpreadMember srt:MinimumMember 2021-03-31
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Form 10-Q
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    
 
For the quarterly period ended March 31, 2021
    
 
    
     or
 
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, N.Y. 10282
(Address of principal executive offices) (Zip Code)
(212)
902-1000
(Registrant’s telephone number, including area code)
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class 
Trading
Symbol
 
Exchange
on which
registered
Common stock, par value $.01 per share
 GS NYSE
Depositary Shares, Each Representing 1/1,000th Interest in a Share of Floating Rate
Non-Cumulative
Preferred Stock, Series A
 GS PrA NYSE
Depositary Shares, Each Representing 1/1,000th Interest in a Share of Floating Rate
Non-Cumulative
Preferred Stock, Series C
 GS PrC NYSE
Depositary Shares, Each Representing 1/1,000th Interest in a Share of Floating Rate
Non-Cumulative
Preferred Stock, Series D
 GS PrD NYSE
Depositary Shares, Each Representing 1/1,000th Interest in a Share of 5.50%
Fixed-to-Floating
Rate
Non-Cumulative
Preferred Stock, Series J
 GS PrJ NYSE
Depositary Shares, Each Representing 1/1,000th Interest in a Share of 6.375%
Fixed-to-Floating
Rate
Non-Cumulative
Preferred Stock, Series K
 GS PrK NYSE
Depositary Shares, Each Representing 1/1,000th Interest in a Share of 6.30%
Non-Cumulative
Preferred Stock, Series N
 GS PrN NYSE
5.793%
Fixed-to-Floating
Rate Normal Automatic Preferred Enhanced Capital Securities of Goldman Sachs Capital II
 GS/43PE NYSE
Floating Rate Normal Automatic Preferred Enhanced Capital Securities of Goldman Sachs Capital III
 GS/43PF NYSE
Medium-Term Notes, Series E, Index-Linked Notes due 2028 of GS Finance Corp.
 FRLG NYSE Arca
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. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in
Rule 12b-2
of the Exchange Act.
 
Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐  Emerging growth company ☐ 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2
of the Exchange Act). ☐ Yes ☒ No
As of April 16, 2021, there were 339,762,194 shares of the registrant’s common stock outstanding.
 

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2021
 
INDEX
 
Form 10-Q
Item Number
 
Page No.
PART I
  
 
   
1  
 
Item 1
 
 
 
1  
 
 1  
 
 1  
 
 2  
 
 3  
 
 4  
 
 
5  
 
 5  
 
 5  
 
 6  
 
 11  
 
 16  
 
 17  
 
 19  
 
 29  
 
 34  
 
 44  
 
 48  
 
 52  
 
 55  
 
 56  
 
 58  
 
 59  
 
 61  
 
 64  
 
 68  
 
 71  
 
 79  
 
 79  
 
 80  
 
 80  
 
 81  
 
 84  
 
 84  
 
Goldman Sachs March 2021 Form 10-Q

PART I. FINANCIAL INFORMATION
Item 1.    Financial Statements (Unaudited)
THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
(Unaudited)
 
  
Three Months
Ended March
 
   
in millions, except per share amounts
 
 
2021
 
   2020 
Revenues
         
Investment banking
 
 
$  3,566
 
   $1,742 
Investment management
 
 
1,796
 
   1,768 
Commissions and fees
 
 
1,073
 
   1,020 
Market making
 
 
5,893
 
   3,682 
Other principal transactions
 
 
3,894
 
   (782
Total
non-interest
revenues
 
 
16,222
 
   7,430 
 
Interest income
 
 
3,054
 
   4,750 
Interest expense
 
 
1,572
 
   3,437 
Net interest income
 
 
1,482
 
   1,313 
Total net revenues
 
 
17,704
 
   8,743 
 
Provision for credit losses
 
 
(70
   937 
 
Operating expenses
         
Compensation and benefits
 
 
6,043
 
   3,235 
Transaction based
 
 
1,256
 
   1,030 
Market development
 
 
80
 
   153 
Communications and technology
 
 
375
 
   321 
Depreciation and amortization
 
 
498
 
   437 
Occupancy
 
 
247
 
   238 
Professional fees
 
 
360
 
   347 
Other expenses
 
 
578
 
   697 
Total operating expenses
 
 
9,437
 
   6,458 
 
Pre-tax
earnings
 
 
8,337
 
   1,348 
Provision for taxes
 
 
1,501
 
   135 
Net earnings
 
 
6,836
 
   1,213 
Preferred stock dividends
 
 
125
 
   90 
Net earnings applicable to common shareholders
 
 
$  6,711
 
   $1,123 
 
Earnings per common share
         
Basic
 
 
$  18.80
 
   $  3.12 
Diluted
 
 
$  18.60
 
   $  3.11 
 
Average common shares
         
Basic
 
 
356.6
 
   358.0 
Diluted
 
 
360.9
 
   361.1 
Consolidated Statements of Comprehensive Income
(Unaudited)
 
  
Three Months
Ended March
 
   
$ in millions
 
 
2021
 
   2020 
Net earnings
 
 
$  6,836
 
   $1,213 
Other comprehensive income/(loss) adjustments, net of tax:
         
Currency translation
 
 
0
 
   (17
Debt valuation adjustment
 
 
(19
   2,914 
Pension and postretirement liabilities
 
 
7
 
   7 
Available-for-sale
securities
 
 
(628
   517 
Other comprehensive income/(loss)
 
 
(640
   3,421 
Comprehensive income
 
 
$  6,196
 
   $4,634 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
1 Goldman Sachs March 2021 Form 10-Q

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
 
  As of 
   
$ in millions
 
 
March
2021
 
 
  December
2020
  
Assets
        
Cash and cash equivalents
 
 
$  
 
191,155
 
  $   155,842 
Collateralized agreements:
        
Securities purchased under agreements to resell (at fair value)
 
 
146,084
 
  108,060 
Securities borrowed (includes
$31,554
and $28,898
at fair value)
 
 
178,245
 
  142,160 
Customer and other receivables (includes
$49
and $82 at fair value)
 
 
164,658
 
  121,331 
Trading assets (at fair value and includes
$62,415
and $
69,031
pledged as collateral)
 
 
374,218
 
  393,630 
Investments (includes
$82,364
and $82,778 at fair value, and
$15,800
and $13,375 pledged as collateral)
 
 
88,016
 
  88,445 
Loans (net of allowance of
$3,515
and $3,874, and includes
$13,482
and $13,625 at fair value)
 
 
121,261
 
  116,115 
Other assets
 
 
37,911
 
  37,445 
Total assets
 
 
$1,301,548
 
  $1,163,028 
 
Liabilities and shareholders’ equity
        
Deposits (includes
$32,229
and $16,176 at fair value)
 
 
$  
 
286,018
 
  $   259,962 
Collateralized financings:
        
Securities sold under agreements to repurchase (at fair value)
 
 
130,607
 
  126,571 
Securities loaned (includes
$3,678
and $1,053 at fair value)
 
 
34,345
 
  21,621 
Other secured financings (includes
$26,197
and $24,126 at fair value)
 
 
27,668
 
  25,755 
Customer and other payables
 
 
224,268
 
  190,658 
Trading liabilities (at fair value)
 
 
200,807
 
  153,727 
Unsecured short-term borrowings (includes
$30,485
and $26,750 at fair value)
 
 
58,463
 
  52,870 
Unsecured long-term borrowings (includes
$39,902
and $40,911 at fair value)
 
 
219,044
 
  213,481 
Other liabilities (includes
$160
and $263 at fair value)
 
 
22,664
 
  22,451 
Total liabilities
 
 
1,203,884
 
  1,067,096 
 
Commitments, contingencies and guarantees
  0   0 
 
Shareholders’ equity
        
Preferred stock; aggregate liquidation preference of
$9,203
and $11,203
 
 
9,203
 
  11,203 
Common stock;
906,270,681
and 901,692,039 shares issued, and
340,018,220
and 344,088,725 shares outstanding
 
 
9
 
  9 
Share-based awards
 
 
3,608
 
  3,468 
Nonvoting common stock; no shares issued and outstanding
 
 
0
 
  0 
Additional
paid-in
capital
 
 
56,340
 
  55,679 
Retained earnings
 
 
119,210
 
  112,947 
Accumulated other comprehensive loss
 
 
(2,074
  (1,434
Stock held in treasury, at cost;
566,252,463
and 557,603,316 shares
 
 
(88,632
  (85,940
Total shareholders’ equity
 
 
97,664
 
  95,932 
Total liabilities and shareholders’ equity
 
 
$1,301,548
 
  $1,163,028 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
Goldman Sachs March 2021 Form 10-Q 2

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders’ Equity
(Unaudited)
 
  
Three Months
Ended March
 
   
$ in millions
 
 
2021
 
   2020 
Preferred stock
         
Beginning balance
 
 
$  11,203
 
   $  11,203 
Issued
 
 
0
 
   350 
Redeemed
 
 
(2,000
   (350
Ending balance
 
 
9,203
 
   11,203 
Common stock
         
Beginning balance
 
 
9
 
   9 
Issued
 
 
0
 
   0 
Ending balance
 
 
9
 
   9 
Share-based awards
         
Beginning balance
 
 
3,468
 
   3,195 
Issuance and amortization of share-based awards
 
 
1,759
 
   1,397 
Delivery of common stock underlying share-based awards
 
 
(1,597
   (1,547
Forfeiture of share-based awards
 
 
(22
   (8
Ending balance
 
 
3,608
 
   3,037 
Additional
paid-in
capital
         
Beginning balance
 
 
55,679
 
   54,883 
Delivery of common stock underlying share-based awards
 
 
1,590
 
   1,541 
Cancellation of share-based awards in satisfaction of withholding tax requirements
 
 
(937
   (803
Issuance costs of redeemed preferred stock
 
 
7
 
   0 
Other
 
 
1
 
   0 
Ending balance
 
 
56,340
 
   55,621 
Retained earnings
         
Beginning balance, as previously reported
 
 
112,947
 
   106,465 
Cumulative effect of change in accounting principle for current expected credit losses, net of tax
 
 
0
 
   (638
Beginning balance, adjusted
 
 
112,947
 
   105,827 
Net earnings
 
 
6,836
 
   1,213 
Dividends and dividend equivalents declared on common stock and share-based awards
 
 
(448
   (449
Dividends declared on preferred stock
 
 
(104
   (89
Preferred stock redemption premium
 
 
(21
   (1
Ending balance
 
 
119,210
 
   106,501 
Accumulated other comprehensive income/(loss)
         
Beginning balance
 
 
(1,434
   (1,484
Other comprehensive income/(loss)
 
 
(640
   3,421 
Ending balance
 
 
(2,074
   1,937 
Stock held in treasury, at cost
         
Beginning balance
 
 
(85,940
   (84,006
Repurchased
 
 
(2,700
   (1,928
Reissued
 
 
10
 
   10 
Other
 
 
(2
   (5
Ending balance
 
 
(88,632
   (85,929
Total shareholders’ equity
 
 
$  97,664
 
   $  92,379 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
3 Goldman Sachs March 2021 Form 10-Q

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
 
  
Three Months
Ended March
 
   
$ in millions
 
 
2021
 
   2020 
Cash flows from operating activities
         
Net earnings
 
 
$    6,836
 
   $    1,213 
Adjustments to reconcile net earnings to net cash used for operating activities:
         
Depreciation and amortization
 
 
498
 
   437 
Share-based compensation
 
 
1,759
 
   1,395 
Gain related to extinguishment of unsecured borrowings
 
 
0
 
   (1
Provision for credit losses
 
 
(70
   937 
Changes in operating assets and liabilities:
         
Customer and other receivables and payables, net
 
 
(9,722
   (7,961
Collateralized transactions (excluding other secured financings), net
 
 
(57,349
   (55,249
Trading assets
 
 
15,373
 
   (20,580
Trading liabilities
 
 
46,777
 
   27,523 
Loans held for sale, net
 
 
(656
   2,624 
Other, net
 
 
(8,629
   (3,369
Net cash used for operating activities
 
 
(5,183
   (53,031
Cash flows from investing activities
         
Purchase of property, leasehold improvements and equipment
 
 
(1,312
   (2,843
Proceeds from sales of property, leasehold improvements and equipment
 
 
192
 
   397 
Purchase of investments
 
 
(12,848
   (10,214
Proceeds from sales and paydowns of investments
 
 
15,319
 
   3,889 
Loans (excluding loans held for sale), net
 
 
(3,838
   (23,565
Net cash used for investing activities
 
 
(2,487
   (32,336
Cash flows from financing activities
         
Unsecured short-term borrowings, net
 
 
3,788
 
   2,915 
Other secured financings (short-term), net
 
 
2,555
 
   16,307 
Proceeds from issuance of other secured financings (long-term)
 
 
1,695
 
   2,969 
Repayment of other secured financings (long-term), including the current portion
 
 
(727
   (445
Purchase of Trust Preferred securities
 
 
0
 
   (11
Proceeds from issuance of unsecured long-term borrowings
 
 
26,426
 
   26,506 
Repayment of unsecured long-term borrowings, including the current portion
 
 
(11,764
   (16,175
Derivative contracts with a financing element, net
 
 
303
 
   134 
Deposits, net
 
 
26,522
 
   28,381 
Preferred stock redemption
 
 
(2,000
   (350
Common stock repurchased
 
 
(2,700
   (1,928
Settlement of share-based awards in satisfaction of withholding tax requirements
 
 
(938
   (804
Dividends and dividend equivalents paid on common stock, preferred stock and share-based awards
 
 
(551
   (538
Proceeds from issuance of preferred stock, net of issuance costs
 
 
0
 
   349 
Other financing, net
 
 
374
 
   0 
Net cash provided by financing activities
 
 
42,983
 
   57,310 
Net increase/(decrease) in cash and cash equivalents
 
 
35,313
 
   (28,057
Cash and cash equivalents, beginning balance
 
 
155,842
 
   133,546 
Cash and cash equivalents, ending balance
 
 
$191,155
 
   $105,489 
 
Supplemental disclosures:
         
Cash payments for interest, net of capitalized interest
 
 
$    1,896
 
   $    4,041 
Cash payments for income taxes, net
 
 
$      
 
555
 
   $       474 
See Notes 12 and 16 for information about
non-cash
activities.
 
The accompanying notes are an integral part of these consolidated financial statements.
 
Goldman Sachs March 2021 Form 10-Q 4

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
Note 1.
Description of Business
The Goldman Sachs Group, Inc. (Group Inc. or parent company), a Delaware corporation, together with its consolidated subsidiaries (collectively, the firm), is a leading global financial institution that delivers a broad range of financial services across investment banking, securities, investment management and consumer banking to a large and diversified client base that includes corporations, financial institutions, governments and 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 4 business segments:
Investment Banking
The firm provides a broad range of investment banking services to a diverse group of corporations, financial institutions, investment funds and governments. Services include strategic advisory assignments with respect to mergers and acquisitions, divestitures, corporate defense activities, restructurings and spin-offs, and equity and debt underwriting of public offerings and private placements. The firm also provides lending to corporate clients, including relationship lending, middle-market lending and acquisition financing. The firm also provides transaction banking services to certain corporate clients.
Global Markets
The firm facilitates client transactions and makes markets in fixed income, equity, currency and commodity products with institutional clients, such as corporations, financial institutions, investment funds and governments. The firm also makes markets in and clears institutional client transactions on major stock, options and futures exchanges worldwide and provides prime brokerage and other equities financing activities, including securities lending, margin lending and swaps. The firm also provides financing to clients through securities purchased under agreements to resell (resale agreements), and through structured credit, warehouse and asset-backed lending.
Asset Management
The firm manages assets 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 clients and a network of third-party distributors around the world. The firm makes equity investments, which include alternative investing activities related to public and private equity investments in corporate, real estate and infrastructure assets, as well as investments through consolidated investment entities, substantially all of which are engaged in real estate investment activities. The firm also invests in corporate debt and provides financing for real estate and other assets.
Consumer & Wealth Management
The firm provides investing and wealth advisory solutions, including financial planning and counseling, executing brokerage transactions and managing assets for individuals in its wealth management business. The firm also provides loans, accepts deposits and provides investing services through its consumer banking digital platform,
Marcus by Goldman Sachs
,
and through its private bank, as well as issues credit cards to consumers.
Note 2.
Basis of Presentation
These consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) and include the accounts of Group Inc. and all other entities in which the firm has a controlling financial interest. Intercompany transactions and balances have been eliminated.
These 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, 2020. References to “the 2020
Form 10-K”
are to the firm’s Annual Report on
Form 10-K
for the year ended December 31, 2020. Certain disclosures included in the annual financial statements have been condensed or omitted from these financial statements as they are not required for interim financial statements under U.S. GAAP and the rules of the Securities and Exchange Commission.
These unaudited 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 2021 and March 2020 refer to the firm’s periods ended, or the dates, as the context requires, March 31, 2021 and March 31, 2020, respectively. All references to December 2020 refer to the date December 31, 2020. Any reference to a future year refers to a year ending on December 31 of that year. Certain reclassifications have been made to previously reported amounts to conform to the current presentation.
In the fourth quarter of 2020, brokerage, clearing, exchange and distribution fees was renamed transaction based and additionally includes expenses resulting from completed transactions, which are directly related to client revenues. Such expenses were previously reported in other expenses. Previously reported amounts have been conformed to the current presentation.
 
5 Goldman Sachs March 2021 Form 10-Q

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(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, measuring the allowance for credit losses on loans and lending commitments accounted for at amortized cost, and when to consolidate an entity. See Note 4 for policies on fair value measurements, Note 9 for policies on the allowance for credit losses, and below and Note 17 for policies on consolidation accounting. All other significant accounting policies are either described below or included in the following footnotes:
 
Fair Value Measurements
  Note 4 
  
Trading Assets and Liabilities
  Note 5 
  
Trading Cash Instruments
  Note 6 
  
Derivatives and Hedging Activities
  Note 7 
  
Investments
  Note 8 
  
Loans
  Note 9 
  
Fair Value Option
  Note 10 
  
Collateralized Agreements and Financings
  Note 11 
  
Other Assets
  Note 12 
  
Deposits
  Note 13 
  
Unsecured Borrowings
  Note 14 
  
Other Liabilities
  Note 15 
  
Securitization Activities
  Note 16 
  
Variable Interest Entities
  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 controlling 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 17 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 generally accounted for 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 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 8 for further information about equity-method investments.
 
Goldman Sachs March 2021 Form 10-Q 6

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
Investment Funds.
The firm has formed 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 generally measured at net asset value (NAV) and are included in investments. See Notes 8, 18 and 22 for further information about investments in funds.
Use of Estimates
Preparation of these consolidated financial statements requires management to make certain estimates and assumptions, the most important of which relate to fair value measurements, the allowance for credit losses on loans and lending commitments accounted for at amortized cost, discretionary compensation accruals, accounting for goodwill and identifiable intangible assets, provisions for losses that may arise from litigation and regulatory proceedings (including governmental investigations), and provisions for losses that may arise from 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 Liabilities at Fair Value.
Trading assets and liabilities and certain investments 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 loans and other financial assets and 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 or other principal transactions. See Note 4 for further information about fair value measurements.
Revenue from Contracts with Clients.
The firm recognizes revenue earned from contracts with clients for services, such as investment banking, investment management, and execution and clearing (contracts with clients), when the performance obligations related to the underlying transaction are completed.
Revenues from contracts with clients represent approximately 35% of total
non-interest
revenues (including approximately 90% of investment banking revenues, approximately 95% of investment management revenues and all commissions and fees) for the three months ended March 2021, and approximately 55% of total
non-interest
revenues (including approximately 85% of investment banking revenues, approximately 95% of investment management revenues and all commissions and fees) for the three months ended March 2020. See Note 25 for information about net revenues by business segment.
Investment Banking
Advisory.
Fees from financial advisory assignments are recognized in revenues when the services related to the underlying transaction are completed under the terms of the assignment.
Non-refundable
deposits and milestone payments in connection with financial advisory assignments are recognized in revenues upon completion of the underlying transaction or when the assignment is otherwise concluded.
Expenses associated with financial advisory assignments are recognized when incurred and are included in transaction based expenses. Client reimbursements for such expenses are included in investment banking revenues.
Underwriting.
Fees from underwriting assignments are recognized in revenues upon completion of the underlying transaction based on the terms of the assignment.
Expenses associated with underwriting assignments are generally deferred until the related revenue is recognized or the assignment is otherwise concluded. Such expenses are included in transaction based expenses for completed assignments.
 
7 Goldman Sachs March 2021 Form 10-Q

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
Investment Management
The firm earns management fees and incentive fees for investment management services, which are included in investment management revenues. The firm makes payments to brokers and advisors related to the placement of the firm’s investment funds (distribution fees), which are included in transaction based expenses.
Management Fees.
Management fees for mutual funds are calculated as a percentage of daily net asset value and are received monthly. Management fees for hedge funds and separately managed accounts are calculated as a percentage of
month-end
net asset value and are generally received quarterly. Management fees for private equity funds are calculated as a percentage of monthly invested capital or committed capital and are received quarterly, semi-annually or annually, depending on the fund. Management fees are recognized over time in the period the services are provided.
Distribution fees paid by the firm are calculated based on either a percentage of the management fee, the investment fund’s net asset value or the committed capital. Such fees are included in transaction based expenses.
Incentive Fees.
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 twelve-month period or over the life of a fund. Fees that are based on performance over a twelve-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 earned from a fund or separately managed account are recognized when it is probable that a significant reversal of such fees will not occur, which is generally when such fees are no longer subject to fluctuations in the market value of investments held by the fund or separately managed account. Therefore, incentive fees recognized during the period may relate to performance obligations satisfied in previous periods.
Commissions and Fees
The firm earns commissions and fees from executing and clearing client transactions on stock, options and futures markets, as well as
over-the-counter
(OTC) transactions. Commissions and fees are recognized on the day the trade is executed. The firm also provides third-party research services to clients in connection with certain soft-dollar arrangements. Third-party research costs incurred by the firm in connection with such arrangements are presented net within commissions and fees.
Remaining Performance Obligations
Remaining performance obligations are services that the firm has committed to perform in the future in connection with its contracts with clients. The firm’s remaining performance obligations are generally related to its financial advisory assignments and certain investment management activities. Revenues associated with remaining performance obligations relating to financial advisory assignments cannot be determined until the outcome of the transaction. For the firm’s investment management activities, where fees are calculated based on the net asset value of the fund or separately managed account, future revenues associated with such remaining performance obligations cannot be determined as such fees are subject to fluctuations in the market value of investments held by the fund or separately managed account.
The firm is able to determine the future revenues associated with management fees calculated based on committed capital. As of March 2021, substantially all future net revenues associated with such remaining performance obligations will be recognized through 2028. Annual revenues associated with such performance obligations average less than $250 million through 2028.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales when the firm has relinquished control over the assets transferred. For transfers of financial assets accounted for as sales, any gains or losses are recognized in net revenues. Assets or liabilities that arise from the firm’s continuing involvement with transferred financial assets are initially recognized at fair value. For transfers of financial assets that are not accounted for as sales, the assets are generally included in trading assets and the transfer is accounted for as a collateralized financing, with the related interest expense recognized over the life of the transaction. See Note 11 for further information about transfers of financial assets accounted for as collateralized financings and Note 16 for further information about transfers of financial assets accounted for as sales.
 
Goldman Sachs March 2021 Form 10-Q 8

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
Cash and Cash Equivalents
The firm defines cash equivalents as highly liquid overnight deposits held in the ordinary course of business. Cash and cash equivalents included cash and due from banks of $11.27 billion as of March 2021 and $11.95 billion as of December 2020. Cash and cash equivalents also included interest-bearing deposits with banks of $179.89 billion as of March 2021 and $143.89 billion as of December 2020.
The firm segregates cash for regulatory and other purposes related to client activity. Cash and cash equivalents segregated for regulatory and other purposes were $25.56 billion as of March 2021 and $24.52 billion as of December 2020. In addition, the firm segregates securities for regulatory and other purposes related to client activity. See Note 11 for further information about segregated securities.
Customer and Other Receivables
Customer and other receivables included receivables from customers and counterparties of $102.46 billion as of March 2021 and $82.39 billion as of December 2020, and receivables from brokers, dealers and clearing organizations of $62.20 billion as of March 2021 and $38.94 billion as of December 2020. Such receivables primarily consist of customer margin loans, receivables resulting from unsettled transactions and collateral posted in connection with certain derivative transactions.
Substantially all of these receivables are accounted for at amortized cost net of any allowance for credit losses, which generally approximates fair value. As these receivables are not accounted for at fair value, they are not included in the firm’s fair value hierarchy in Notes 4 through 10. Had these receivables been included in the firm’s fair value hierarchy, substantially all would have been classified in level 2 as of both March 2021 and December 2020. See Note 10 for further information about customer and other receivables accounted for at fair value under the fair value option. Interest on customer and other receivables is recognized over the life of the transaction and included in interest income.
Customer and other receivables includes receivables from contracts with clients and contract assets. Contract assets represent the firm’s right to receive consideration for services provided in connection with its contracts with clients for which collection is conditional and not merely subject to the passage of time. The firm’s receivables from contracts with clients were $2.87 billion as of March 2021 and $2.60 billion as of December 2020. As of both March 2021 and December 2020 contract assets were not material.
Customer and Other Payables
Customer and other payables included payables to customers and counterparties of $201.05 billion as of March 2021 and $183.57 billion as of December 2020, and payables to brokers, dealers and clearing organizations of $23.22 billion as of March 2021 and $7.09 billion as of December 2020. Such payables primarily consist of customer credit balances related to the firm’s prime brokerage activities. Customer and other payables are accounted for at cost plus accrued interest, which generally approximates fair value. As these payables are not accounted for at fair value, they are not included in the firm’s fair value hierarchy in Notes 4 through 10. Had these payables been included in the firm’s fair value hierarchy, substantially all would have been classified in level 2 as of both March 2021 and December 2020. Interest on customer and other payables is recognized over the life of the transaction and included in interest expense.
Offsetting Assets and Liabilities
To reduce credit exposures on derivatives and securities financing transactions, the firm may enter into master netting agreements or similar arrangements (collectively, netting agreements) with counterparties that permit it to offset receivables and payables with such counterparties. A netting agreement is a contract with a counterparty that permits net settlement of multiple transactions with that counterparty, including upon the exercise of termination rights by a
non-defaulting
party. Upon exercise of such termination rights, all transactions governed by the netting agreement are terminated and a net settlement amount is calculated. In addition, the firm receives and posts cash and securities collateral with respect to its derivatives and securities financing transactions, subject to the terms of the related credit support agreements or similar arrangements (collectively, credit support agreements). An enforceable credit support agreement grants the
non-defaulting
party exercising termination rights the right to liquidate the collateral and apply the proceeds to any amounts owed. In order to assess enforceability of the firm’s right of setoff under netting and credit support agreements, the firm evaluates various factors, including applicable bankruptcy laws, local statutes and regulatory provisions in the jurisdiction of the parties to the agreement.
 
9 Goldman Sachs March 2021 Form 10-Q

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
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) in the consolidated balance sheets when a legal right of setoff exists under an enforceable netting agreement. Resale agreements and securities sold under agreements to repurchase (repurchase agreements) and securities borrowed and loaned transactions with the same term and currency are presented on a
net-by-counterparty
basis in the consolidated balance sheets when such transactions meet certain settlement criteria and are subject to netting agreements.
In the consolidated balance sheets, derivatives are reported net of cash collateral received and posted under enforceable credit support agreements, when transacted under an enforceable netting agreement. In the consolidated balance sheets, resale and repurchase agreements, and securities borrowed and loaned, are not reported net of the related cash and securities received or posted as collateral. See Note 11 for further information about collateral received and pledged, including rights to deliver or repledge collateral. See Notes 7 and 11 for further information about offsetting assets and liabilities.
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 awards that require future service are amortized over the relevant service period. Forfeitures are recorded when they occur.
Cash dividend equivalents paid on restricted stock units (RSUs) are generally charged to retained earnings. If RSUs that require future service are forfeited, the related dividend equivalents originally charged to retained earnings are reclassified to compensation expense in the period in which forfeiture occurs.
The firm generally issues new shares of common stock upon delivery of share-based awards. In certain cases, primarily related to conflicted employment (as outlined in the applicable award agreements), the firm may cash settle share-based compensation awards accounted for as equity instruments. For these awards, whose terms allow for cash settlement, additional
paid-in
capital is adjusted to the extent of the difference between the value of the award at the time of cash settlement and the grant-date value of the award. The tax effect related to the settlement of share-based awards is recorded in income tax benefit or expense.
Foreign Currency Translation
Assets and liabilities denominated in
non-U.S.
currencies are translated at rates of exchange prevailing on the date of the consolidated balance sheets and revenues and expenses are translated at average rates of exchange for the period. Foreign currency remeasurement gains or losses on transactions in nonfunctional currencies are recognized in earnings. Gains or losses on translation of the financial statements of a
non-U.S.
operation, when the functional currency is other than the U.S. dollar, are included, net of hedges and taxes, in the consolidated statements of comprehensive income.
Recent Accounting Developments
Measurement of Credit Losses on Financial Instruments (ASC 326).
In June 2016, the FASB issued ASU
No. 2016-13,
“Financial Instruments — Credit Losses (Topic 326) — Measurement of Credit Losses on Financial Instruments.” This ASU amends several aspects of the measurement of credit losses on certain financial instruments, including replacing the existing incurred credit loss model and other models with the Current Expected Credit Losses (CECL) model and amending certain aspects of accounting for purchased financial assets with deterioration in credit quality since origination.
The firm adopted this ASU in January 2020 under a modified retrospective approach. As a result of adopting this ASU, the firm’s allowance for credit losses on financial assets and commitments that are measured at amortized cost reflects management’s estimate of credit losses over the remaining expected life of such assets. Expected credit losses for newly recognized financial assets and commitments, as well as changes to expected credit losses during the period, are recognized in earnings. These expected credit losses are measured based on historical experience, current conditions and forecasts that affect the collectability of the reported amount.
The cumulative effect of measuring the allowance under CECL as a result of adopting this ASU as of January 1, 2020 was an increase in the allowance for credit losses of $848 million. The increase in the allowance is driven by the fact that the allowance under CECL covers expected credit losses over the full expected life of the loan portfolios and also takes into account forecasts of expected future economic conditions. In addition, in accordance with the ASU, the firm elected the fair value option for loans that were previously accounted for as Purchased Credit Impaired (PCI), which resulted in a decrease to the allowance for PCI loans of $169 million. The cumulative effect of adopting this ASU was a decrease to retained earnings of $638 million (net of tax).
 
Goldman Sachs March 2021 Form 10-Q 10

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
Facilitation of the Effects of Reference Rate Reform on Financial Reporting (ASC 848).
In March 2020, the FASB issued ASU
No. 2020-04,
“Reference Rate Reform — Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” This ASU provides optional relief from applying generally accepted accounting principles to contracts, hedging relationships and other transactions affected by reference rate reform. In addition, in January 2021 the FASB issued ASU
No. 2021-01
“Reference Rate Reform — Scope,” which clarified the scope of ASC 848 relating to contract modifications. The firm adopted these ASUs upon issuance and elected to apply the relief available to certain modified derivatives. The adoption of these ASUs did not have a material impact on the firm’s consolidated financial statements.
Note 4.
Fair Value Measurements
The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. Fair value measurements do not include transaction costs. The firm measures certain financial assets and liabilities as a portfolio (i.e., based on its net exposure to market and/or credit risks).
The best evidence of fair value is a quoted price in an active market. If quoted prices in active markets are not available, fair value is determined by reference to prices for similar instruments, quoted prices or recent transactions in less active markets, or internally developed models that primarily use market-based or independently sourced inputs, including, but not limited to, interest rates, volatilities, equity or debt prices, foreign exchange rates, commodity prices, credit spreads and funding spreads (i.e., the spread or difference between the interest rate at which a borrower could finance a given financial instrument relative to a benchmark interest rate).
U.S. GAAP has a three-level hierarchy for disclosure of fair value measurements. This 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 this hierarchy is based on the lowest level of input that is significant to its fair value measurement. In evaluating the significance of a valuation input, the firm considers, among other factors, a portfolio’s net risk exposure to that input. 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.
The fair values for substantially all of the firm’s financial assets and liabilities are based on observable prices and inputs and are classified in levels 1 and 2 of the fair value hierarchy. Certain level 2 and level 3 financial assets and liabilities may require valuation adjustments that a market participant would require to arrive at fair value for factors, such as counterparty and the firm’s credit quality, funding risk, transfer restrictions, liquidity and bid/offer spreads. Valuation adjustments are generally based on market evidence.
 
11 Goldman Sachs March 2021 Form 10-Q

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
The valuation techniques and nature of significant inputs used to determine the fair value of the firm’s financial instruments are described below. See Notes 5 through 10 for further information about significant unobservable inputs used to value level 3 financial instruments.
Valuation Techniques and Significant Inputs for Trading Cash Instruments, Investments and Loans
Level 1.
Level 1 instruments include U.S. government obligations, most
non-U.S.
government obligations, certain agency obligations, certain corporate debt instruments, certain money market instruments and actively traded listed equities. These instruments are valued using quoted prices for identical unrestricted instruments in active markets. The firm defines active markets for equity instruments based on the average daily trading volume both in absolute terms and relative to the market capitalization for the instrument. The firm defines active markets for debt instruments based on both the average daily trading volume and the number of days with trading activity.
Level 2.
Level 2 instruments include certain
non-U.S.
government obligations, most agency obligations, most mortgage-backed loans and securities, most corporate debt instruments, most state and municipal obligations, most money market instruments, most other debt obligations, restricted or less liquid listed equities, certain private equities, commodities and certain lending commitments.
Valuations of level 2 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 instruments (i) if the instrument is subject to transfer restrictions and/or (ii) for other premiums and liquidity discounts that a market participant would require to arrive at fair value. Valuation adjustments are generally based on market evidence.
Level 3.
Level 3 instruments have one or more significant valuation inputs that are not observable. Absent evidence to the contrary, level 3 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.
Valuation techniques of level 3 instruments vary by instrument, but are generally based on discounted cash flow techniques. The valuation techniques and the nature of significant inputs used to determine the fair values of each type of level 3 instrument are described below:
Loans and Securities Backed by Commercial Real Estate
Loans and securities backed by commercial real estate are directly or indirectly collateralized by a single property or a portfolio of properties, and may include tranches of varying levels of subordination. Significant inputs are generally determined based on relative value analyses and include:
 
 
Market yields implied by transactions of similar or related assets and/or current levels and changes in market indices, such as the CMBX (an index that tracks the performance of commercial mortgage bonds);
 
 
Transaction prices in both the underlying collateral and instruments with the same or similar underlying collateral;
 
 
A measure of expected future cash flows in a default scenario (recovery rates) implied by the value of the underlying collateral, which is mainly driven by current performance of the underlying collateral and capitalization rates. Recovery rates are expressed as a percentage of notional or face value of the instrument and reflect the benefit of credit enhancements on certain instruments; and
 
 
Timing of expected future cash flows (duration) which, in certain cases, may incorporate the impact of any loan forbearances and other unobservable inputs (e.g., prepayment speeds).
Loans and Securities Backed by Residential Real Estate
Loans and securities backed by residential real estate are directly or indirectly collateralized by portfolios of residential real estate and may include tranches of varying levels of subordination. Significant inputs are generally determined based on relative value analyses, which incorporate comparisons to instruments with similar collateral and risk profiles. Significant inputs include:
 
 
Market yields implied by transactions of similar or related assets;
 
 
Transaction prices in both the underlying collateral and instruments with the same or similar underlying collateral;
 
 
Cumulative loss expectations, driven by default rates, home price projections, residential property liquidation timelines, related costs and subsequent recoveries; and
 
 
Duration, driven by underlying loan prepayment speeds and residential property liquidation timelines.
 
Goldman Sachs March 2021 Form 10-Q 12

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
Corporate Debt Instruments
Corporate debt instruments includes corporate loans, debt securities and convertible debentures. Significant inputs for corporate debt instruments are generally determined based on relative value analyses, which incorporate comparisons both to prices of credit default swaps that reference the same or similar underlying instrument or entity and to other debt instruments for the same or similar issuer for which observable prices or broker quotations are available. Significant inputs include:
 
 
Market yields implied by transactions of similar or related assets and/or current levels and trends of market indices, such as the CDX (an index that tracks the performance of corporate credit);
 
 
Current performance and recovery assumptions and, where the firm uses credit default swaps to value the related instrument, the cost of borrowing the underlying reference obligation;
 
 
Duration; and
 
 
Market and transaction multiples for corporate debt instruments with convertibility or participation options.
Equity Securities
Equity securities consists of private equities. Recent third-party completed or pending transactions (e.g., merger proposals, debt restructurings, tender offers) are considered the best evidence for any change in fair value. When these are not available, the following valuation methodologies are used, as appropriate:
 
 
Industry multiples (primarily EBITDA and revenue multiples) and public comparables;
 
 
Transactions in similar instruments;
 
 
Discounted cash flow techniques; and
 
 
Third-party appraisals.
The firm also considers changes in the outlook for the relevant industry and financial performance of the issuer as compared to projected performance. Significant inputs include:
 
 
Market and transaction multiples;
 
 
Discount rates and capitalization rates; and
 
 
For equity securities with debt-like features, market yields implied by transactions of similar or related assets, current performance and recovery assumptions, and duration.
Other Trading Cash Instruments, Investments and Loans
The significant inputs to the valuation of other instruments, such as
non-U.S.
government obligations and U.S. and
non-U.S.
agency obligations, state and municipal obligations, and other loans and debt obligations are generally determined based on relative value analyses, which incorporate comparisons both to prices of credit default swaps that reference the same or similar underlying instrument or entity and to other debt instruments for the same issuer for which observable prices or broker quotations are available. Significant inputs include:
 
 
Market yields implied by transactions of similar or related assets and/or current levels and trends of market indices;
 
 
Current performance and recovery assumptions and, where the firm uses credit default swaps to value the related instrument, the cost of borrowing the underlying reference obligation; and
 
 
Duration.
Valuation Techniques and Significant Inputs for Derivatives
The firm’s level 2 and level 3 derivatives are valued using derivative pricing models (e.g., discounted cash flow models, correlation models and models that incorporate option pricing methodologies, such as Monte Carlo simulations). Price transparency of derivatives can generally be characterized by product type, as described below.
 
 
Interest Rate.
In general, the key inputs used to value interest rate derivatives are transparent, even for most long-dated contracts. Interest rate swaps and options denominated in the currencies of leading industrialized nations are characterized by high trading volumes and tight bid/offer spreads. Interest rate derivatives that reference indices, such as an inflation index, or the shape of the yield curve (e.g.,
10-year
swap rate vs.
2-year
swap rate) are more complex, but the key inputs are generally observable.
 
 
Credit.
Price transparency for credit default swaps, including both single names and baskets of credits, varies by market and underlying reference entity or obligation. Credit default swaps that reference indices, large corporates and major sovereigns generally exhibit the most price transparency. For credit default swaps with other underliers, price transparency varies based on credit rating, the cost of borrowing the underlying reference obligations, and the availability of the underlying reference obligations for delivery upon the default of the issuer. Credit default swaps that reference loans, asset-backed securities and emerging market debt instruments tend to have less price transparency than those that reference corporate bonds. In addition, more complex credit derivatives, such as those sensitive to the correlation between two or more underlying reference obligations, generally have less price transparency.
 
13 Goldman Sachs March 2021 Form 10-Q

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
 
Currency.
Prices for currency derivatives based on the exchange rates of leading industrialized nations, including those with longer tenors, are generally transparent. The primary difference between the price transparency of developed and emerging market currency derivatives is that emerging markets tend to be only observable for contracts with shorter tenors.
 
 
Commodity.
Commodity derivatives include transactions referenced to energy (e.g., oil, natural gas and electricity), metals (e.g., precious and base) and soft commodities (e.g., agricultural). Price transparency varies based on the underlying commodity, delivery location, tenor and product quality (e.g., diesel fuel compared to unleaded gasoline). In general, price transparency for commodity derivatives is greater for contracts with shorter tenors and contracts that are more closely aligned with major and/or benchmark commodity indices.
 
 
Equity.
Price transparency for equity derivatives varies by market and underlier. Options on indices and the common stock of corporates included in major equity indices exhibit the most price transparency. Equity derivatives generally have observable market prices, except for contracts with long tenors or reference prices that differ significantly from current market prices. More complex equity derivatives, such as those sensitive to the correlation between two or more individual stocks, generally have less price transparency.
Liquidity is essential to observability of all product types. If transaction volumes decline, previously transparent prices and other inputs may become unobservable. Conversely, even highly structured products may at times have trading volumes large enough to provide observability of prices and other inputs.
Level 1.
Level 1 derivatives include short-term contracts for future delivery of securities when the underlying security is a level 1 instrument, and exchange-traded derivatives if they are actively traded and are valued at their quoted market price.
Level 2.
Level 2 derivatives include OTC derivatives for which all significant valuation inputs are corroborated by market evidence and exchange-traded derivatives that are not actively traded and/or that are valued using models that calibrate to market-clearing levels of OTC derivatives.
The selection of a particular model to value a derivative depends on the contractual terms of and specific risks inherent in the instrument, as well as the availability of pricing information in the market. For derivatives that trade in liquid markets, model selection does not involve significant management judgment because outputs of models can be calibrated to market-clearing levels.
Valuation models require a variety of inputs, such as contractual terms, market prices, yield curves, discount rates (including those derived from interest rates on collateral received and posted as specified in credit support agreements for collateralized derivatives), credit curves, measures of volatility, prepayment rates, loss severity rates and correlations of such inputs. Significant inputs to the valuations of level 2 derivatives can be verified to market transactions, broker or dealer quotations or other alternative pricing sources with reasonable levels of price transparency. Consideration is given to the nature of the quotations (e.g., indicative or firm) and the relationship of recent market activity to the prices provided from alternative pricing sources.
Level 3.
Level 3 derivatives are valued using models which utilize observable level 1 and/or level 2 inputs, as well as unobservable level 3 inputs. The significant unobservable inputs used to value the firm’s level 3 derivatives are described below.
 
 
For level 3 interest rate and currency derivatives, significant unobservable inputs include correlations of certain currencies and interest rates (e.g., the correlation between Euro inflation and Euro interest rates) and specific interest rate and currency volatilities.
 
 
For level 3 credit derivatives, significant unobservable inputs include illiquid credit spreads and upfront credit points, which are unique to specific reference obligations and reference entities, and recovery rates.
 
 
For level 3 commodity derivatives, significant unobservable inputs include volatilities for options with strike prices that differ significantly from current market prices and prices or spreads for certain products for which the product quality or physical location of the commodity is not aligned with benchmark indices.
 
 
For level 3 equity derivatives, significant unobservable inputs generally include equity volatility inputs for options that are 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 correlation inputs, such as the correlation of the price performance of two or more individual stocks or the correlation of the price performance for a basket of stocks to another asset class, such as commodities.
 
Goldman Sachs March 2021 Form 10-Q 14

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
Subsequent to the initial valuation of a level 3 derivative, the firm updates the level 1 and level 2 inputs to reflect observable market changes and any resulting gains and losses are classified in level 3. Level 3 inputs are changed when corroborated by evidence, such as similar market transactions, third-party pricing services and/or broker or dealer quotations or other empirical market data. In circumstances where the firm cannot verify the model value by reference to market transactions, it is possible that a different valuation model could produce a materially different estimate of fair value. See Note 7 for further information about significant unobservable inputs used in the valuation of level 3 derivatives.
Valuation Adjustments.
Valuation adjustments are integral to determining the fair value of derivative portfolios and are used to adjust the
mid-market
valuations produced by derivative pricing models to the exit price valuation. These adjustments incorporate bid/offer spreads, the cost of liquidity, credit valuation adjustments and funding valuation adjustments, which account for the credit and funding risk inherent in the uncollateralized portion of derivative portfolios. The firm also makes funding valuation adjustments to collateralized derivatives where the terms of the agreement do not permit the firm to deliver or repledge collateral received. 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.
Valuation Techniques and Significant Inputs for Other Financial Instruments at Fair Value
In addition to trading cash instruments, derivatives, and certain investments and loans, the firm accounts for certain of its other financial assets and liabilities at fair value under the fair value option. Such instruments include repurchase agreements and substantially all resale agreements; securities borrowed and loaned in Fixed Income, Currency and Commodities (FICC) financing; certain customer and other receivables, including certain margin loans; certain time deposits, including structured certificates of deposit, which are hybrid financial instruments; substantially all other secured financings, including transfers of assets accounted for as financings; certain unsecured short- and long-term borrowings, substantially all of which are hybrid financial instruments; and other liabilities. These instruments are generally valued based on discounted cash flow techniques, which incorporate inputs with reasonable levels of price transparency, and are generally classified in level 2 because the inputs are observable. Valuation adjustments may be made for liquidity and for counterparty and the firm’s credit quality. The significant inputs used to value the firm’s other financial instruments are described below.
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 funding spreads, the amount and timing of expected future cash flows and interest rates.
Customer and Other Receivables.
The significant inputs to the valuation of receivables are interest rates, the amount and timing of expected future cash flows and funding spreads.
Deposits.
The significant inputs to the valuation of time deposits are interest rates and the amount and timing of future cash flows. The inputs used to value the embedded derivative component of hybrid financial instruments are consistent with the inputs used to value the firm’s other derivative instruments described above. See Note 7 for further information about derivatives and Note 13 for further information about deposits.
Other Secured Financings.
The significant inputs to the valuation of other secured financings are the amount and timing of expected future cash flows, interest rates, funding spreads and the fair value of the collateral delivered by the firm (determined using the amount and timing of expected future cash flows, market prices, market yields and recovery assumptions). See Note 11 for further information about other secured financings.
Unsecured Short- and Long-Term Borrowings.
The significant inputs to the valuation of unsecured short- and long-term borrowings are the amount and timing of expected future cash flows, interest rates, the credit spreads of the firm and commodity prices for prepaid commodity transactions. The inputs used to value the embedded derivative component of hybrid financial instruments are consistent with the inputs used to value the firm’s other derivative instruments described above. See Note 7 for further information about derivatives and Note 14 for further information about borrowings.
Other Liabilities.
The significant inputs to the valuation of other liabilities are the amount and timing of expected future cash flows and equity volatility and correlation inputs. The inputs used to value the embedded derivative component of hybrid financial instruments are consistent with the inputs used to value the firm’s other derivative instruments described above. See Note 7 for further information about derivatives.
 
15 Goldman Sachs March 2021 Form 10-Q

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
Financial Assets and Liabilities at Fair Value
The table below presents financial assets and liabilities accounted for at fair value.
 
  As of 
   
$ in millions
 
 
March
2021
 
 
   December
2020
  
Total level 1 financial assets
 
 
$  
    
253,650
 
   $   263,999 
Total level 2 financial assets
 
 
428,190
 
   410,275 
Total level 3 financial assets
 
 
26,893
 
   26,305 
Investments in funds at NAV
 
 
3,758
 
   3,664 
Counterparty and cash collateral netting
 
 
(64,740
   (77,170
Total financial assets at fair value
 
 
$  
    
647,751
 
   $   627,073 
 
Total assets
 
 
$1,301,548
 
   $1,163,028 
 
Total level 3 financial assets divided by:
         
Total assets
 
 
2.1%
 
   2.3% 
Total financial assets at fair value
 
 
4.2%
 
   4.2% 
Total level 1 financial liabilities
 
 
$  
    
133,542
 
   $     85,120 
Total level 2 financial liabilities
 
 
350,494
 
   331,824 
Total level 3 financial liabilities
 
 
33,192
 
   32,930 
Counterparty and cash collateral netting
 
 
(53,163
   (60,297
Total financial liabilities at fair value
 
 
$  
    
464,065
 
   $   389,577 
 
Total liabilities
 
 
$1,203,884
 
   $1,067,096 
 
Total level 3 financial liabilities divided by:
         
Total liabilities
 
 
2.8%
 
   3.1% 
Total financial liabilities at fair value
 
 
7.2%
 
   8.5% 
In the table above:
 
 
Counterparty netting among positions classified in the same level is included in that level.
 
 
Counterparty and cash collateral netting represents the impact on derivatives of netting across levels.
The table below presents a summary of level 3 financial assets.
 
  As of 
   
$ in millions
 
 
March
2021
 
 
   December
2020
  
Trading assets:
         
Trading cash instruments
 
 
$
  
    1,373
 
   $      1,237 
Derivatives
 
 
5,940
 
   5,967 
Investments
 
 
17,049
 
   16,423 
Loans
 
 
2,531
 
   2,678 
Total
 
 
$
  
  26,893
 
   $    26,305 
Level 3 financial assets as of March 2021 increased compared with December 2020, primarily reflecting an increase in level 3 investments. See Notes 5 through 10 for further information about level 3 financial assets (including information about unrealized gains and losses related to level 3 financial assets and transfers in and out of level 3).
Note 5.
Trading Assets and Liabilities
Trading assets and liabilities include trading cash instruments and derivatives held in connection with the firm’s market-making or risk management activities. These assets and liabilities are accounted for at fair value either under the fair value option or in accordance with other U.S. GAAP, and the related fair value gains and losses are generally recognized in the consolidated statements of earnings.
The table below presents a summary of trading assets and liabilities.
 
$ in millions
  Trading
Assets
 
 
   Trading
Liabilities
 
 
As of March 2021
         
Trading cash instruments
 
 
$304,675
 
  
 
$150,585
 
Derivatives
 
 
69,543
 
  
 
50,222
 
Total
 
 
$374,218
 
  
 
$200,807
 
 
As of December 2020
         
Trading cash instruments
  $324,049    $  95,136 
Derivatives
  69,581    58,591 
Total
  $393,630    $153,727 
See Note 6 for further information about trading cash instruments and Note 7 for further information about derivatives.
Gains and Losses from Market Making
The table below presents market making revenues by major product type.
 
  
Three Months
Ended March
 
   
$ in millions
 
 
2021
 
   2020 
Interest rates
 
 
$
  
  (1,243
   $
    
      737
 
Credit
 
 
852
 
   1,842 
Currencies
 
 
2,850
 
   (735
Equities
 
 
2,778
 
   1,700 
Commodities
 
 
656
 
   138 
Total
 
 
$    5,893
 
   $    3,682 
In the table above:
 
 
Gains/(losses) include both realized and unrealized gains and losses. Gains/(losses) exclude related interest income and interest expense. See Note 23 for further information about interest income and interest expense.
 
 
Gains and losses included in market making are primarily related to the firm’s trading assets and liabilities, including both derivative and
non-derivative
financial instruments.
 
 
Gains/(losses) are not representative of the manner in which the firm manages its business activities because many of the firm’s market-making and client facilitation 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 across product types are sensitive to changes in interest rates and may be economically hedged with interest rate swaps. Similarly, a significant portion of the firm’s trading cash instruments and derivatives across product types has exposure to foreign currencies and may be economically hedged with foreign currency contracts.
 
Goldman Sachs March 2021 Form 10-Q 16

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
Note 6.
Trading Cash Instruments
 
Trading cash instruments consists of instruments held in connection with the firm’s market-making or risk management activities. These instruments are accounted for at fair value and the related fair value gains and losses are recognized in the consolidated statements of earnings.
Fair Value of Trading Cash Instruments by Level
The table below presents trading cash instruments by level within the fair value hierarchy.
 
$ in millions
  Level 1   Level 2   Level 3   Total 
As of March 2021
                
Assets
                
Government and agency obligations:
             
U.S.
 
 
$   66,374
 
 
 
$  27,233
 
 
 
$       –
 
 
 
$   93,607
 
Non-U.S.
 
 
53,647
 
 
 
14,906
 
 
 
19
 
 
 
68,572
 
Loans and securities backed by:
                
Commercial real estate
 
 
 
 
 
736
 
 
 
115
 
 
 
851
 
Residential real estate
 
 
 
 
 
8,619
 
 
 
204
 
 
 
8,823
 
Corporate debt instruments
 
 
488
 
 
 
33,134
 
 
 
918
 
 
 
34,540
 
State and municipal obligations
 
 
 
 
 
216
 
 
 
 
 
 
216
 
Other debt obligations
 
 
202
 
 
 
1,830
 
 
 
45
 
 
 
2,077
 
Equity securities
 
 
86,325
 
 
 
2,784
 
 
 
72
 
 
 
89,181
 
Commodities
 
 
 
 
 
6,808
 
 
 
 
 
 
6,808
 
Total
 
 
$ 207,036
 
 
 
$  96,266
 
 
 
$1,373
 
 
 
$ 304,675
 
 
Liabilities
                
Government and agency obligations:
             
U.S.
 
 
$  (20,825
 
 
$      
 
 
(11
 
 
$       –
 
 
 
$  (20,836
Non-U.S.
 
 
(31,972
 
 
(2,632
 
 
 
 
 
(34,604
Loans and securities backed by:
                
Commercial real estate
 
 
 
 
 
(23
 
 
(4
 
 
(27
Residential real estate
 
 
 
 
 
(45
 
 
 
 
 
(45
Corporate debt instruments
 
 
(67
 
 
(13,782
 
 
(71
 
 
(13,920
Other debt obligations
 
 
 
 
 
 
 
 
(1
 
 
(1
Equity securities
 
 
(80,610
 
 
(503
 
 
(30
 
 
(81,143
Commodities
 
 
 
 
 
(9
 
 
 
 
 
(9
Total
 
 
$(133,474
 
 
$
 
(17,005
 
 
$
  
(106
 
 
$(150,585
 
As of December 2020
                
Assets
                
Government and agency obligations:
             
U.S.
  $
   
93,670
   $  44,863   $
    
      –
   $
  
138,533
 
Non-U.S.
  46,147   11,261   15   57,423 
Loans and securities backed by:
                
Commercial real estate
     597   203   800 
Residential real estate
     6,948   131   7,079 
Corporate debt instruments
  915   29,639   797   31,351 
State and municipal obligations
     200      200 
Other debt obligations
  338   1,055   19   1,412 
Equity securities
  75,300   2,505   72   77,877 
Commodities
     9,374      9,374 
Total
  $
 
216,370
   $106,442   $1,237   $
  
324,049
 
 
Liabilities
    
Government and agency obligations:
             
U.S.
  $
    
  (16,880
  $        (13  $
    
      –
   $
 
  (16,893
Non-U.S.
  (22,092  (1,792     (23,884
Loans and securities backed by:
                
Commercial real estate
     (17  (1  (18
Residential real estate
     (1     (1
Corporate debt instruments
  (2  (7,970  (50  (8,022
State and municipal obligations
     (5     (5
Other debt obligations
        (2  (2
Equity securities
  (45,734  (550  (27  (46,311
Total
  $
    
  (84,708
  $ (10,348  $    (80  $
 
  (95,136
In the table above:
 
 
Trading cash instrument assets are shown as positive amounts and trading cash instrument liabilities are shown as negative amounts.
 
 
Corporate debt instruments includes corporate loans, debt securities, convertible debentures, prepaid commodity transactions and transfers of assets accounted for as secured loans rather than purchases.
 
 
Equity securities includes public equities and exchange-traded funds.
 
 
Other debt obligations includes other asset-backed securities and money market instruments.
See Note 4 for an overview of the firm’s fair value measurement policies and the valuation techniques and significant inputs used to determine the fair value of trading cash instruments.
Significant Unobservable Inputs
The table below presents the amount of level 3 assets, and ranges and weighted averages of significant unobservable inputs used to value level 3 trading cash instruments.
 
  
As of March 2021
  
    
 As of December 2020 
      
$ in millions
 
 
Amount or
Range
 
 
 
 
Weighted
Average
 
 
    Amount or
Range
    Weighted
Average
 
 
Loans and securities backed by commercial real estate
 
Level 3 assets
 
 
$115
 
        $203     
Yield
 
 
2.1% to 23.5%
 
 
 
13.5%
 
    1.7% to 22.0%   9.0% 
Recovery rate
 
 
13.0% to 96.5%
 
 
 
62.2%
 
    5.1% to 94.9%   57.7% 
Duration (years)
 
 
0.9 to 4.9
 
 
 
2.6
 
    1.1 to 9.1   5.0 
Loans and securities backed by residential real estate
 
Level 3 assets
 
 
$204
 
        $131     
Yield
 
 
1.0% to 34.8%
 
 
 
6.9%
 
    0.6% to 15.7%   6.3% 
Cumulative loss rate
 
 
6.5% to 31.0%
 
 
 
16.4%
 
    3.4% to 45.6%   20.8% 
Duration (years)
 
 
0.4 to 23.5
 
 
 
5.1
 
    0.9 to 16.1   6.5 
Corporate debt instruments
               
Level 3 assets
 
 
$918
 
        $797     
Yield
 
 
0.2% to 32.3%
 
 
 
7.6%
 
    0.6% to 30.6%   9.5% 
Recovery rate
 
 
0.0% to 70.3%
 
 
 
55.2%
 
    0.0% to 73.6%   58.7% 
Duration (years)
 
 
0.2 to 14.1
 
 
 
3.8
 
    0.3 to 25.5   4.0 
Level 3 government and agency obligations, other debt obligations and equity securities were not material as of both March 2021 and December 2020, and therefore are not included in the table above.
 
17 Goldman Sachs March 2021 Form 10-Q

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
In the table above:
 
 
Ranges represent the significant unobservable inputs that were used in the valuation of each type of trading cash instrument.
 
 
Weighted averages are calculated by weighting each input by the relative fair value of the trading cash instruments.
 
 
The ranges and weighted averages of these inputs are not representative of the appropriate inputs to use when calculating the fair value of any one trading cash instrument. For example, the highest recovery rate for corporate debt instruments is appropriate for valuing a specific corporate debt instrument, but may not be appropriate for valuing any other corporate debt instrument. Accordingly, the ranges of inputs do not represent uncertainty in, or possible ranges of, fair value measurements of level 3 trading cash instruments.
 
 
Increases in yield, duration or cumulative loss rate used in the valuation of level 3 trading cash instruments would have resulted in a lower fair value measurement, while increases in recovery rate would have resulted in a higher fair value measurement as of both March 2021 and December 2020. Due to the distinctive nature of each level 3 trading cash instrument, the interrelationship of inputs is not necessarily uniform within each product type.
 
 
Trading cash instruments are valued using discounted cash flows.
Level 3 Rollforward
The table below presents a summary of the changes in fair value for level 3 trading cash instruments.
 
  
Three Months
Ended March
 
   
$ in millions
 
 
2021
 
   2020 
Total trading cash instrument assets
         
Beginning balance
 
 
$1,237
 
   $1,242 
Net realized gains/(losses)
 
 
33
 
   34 
Net unrealized gains/(losses)
 
 
33
 
   (159
Purchases
 
 
521
 
   353 
Sales
 
 
(307
   (268
Settlements
 
 
(153
   (153
Transfers into level 3
 
 
224
 
   342 
Transfers out of level 3
 
 
(215
   (157
Ending balance
 
 
$1,373
 
   $1,234 
 
Total trading cash instrument liabilities
         
Beginning balance
 
 
$
  
  (80
   $  (273
Net realized gains/(losses)
 
 
1
 
    
Net unrealized gains/(losses)
 
 
(2
   91 
Purchases
 
 
21
 
   26 
Sales
 
 
(40
   (32
Settlements
 
 
7
 
   (2
Transfers into level 3
 
 
(19
   (13
Transfers out of level 3
 
 
6
 
   9 
Ending balance
 
 
$
  
(106
   $  (194
In the table above:
 
 
Changes in fair value are presented for all trading cash instruments that are classified in level 3 as of the end of the period.
 
 
Net unrealized gains/(losses) relates to trading cash instruments that were still held at
period-end.
 
 
Transfers between levels of the fair value hierarchy are reported at the beginning of the reporting period in which they occur. If a trading cash instrument was transferred to level 3 during a reporting period, its entire gain or loss for the period is classified in level 3.
 
 
For level 3 trading cash instrument assets, increases are shown as positive amounts, while decreases are shown as negative amounts. For level 3 trading cash instrument liabilities, increases are shown as negative amounts, while decreases are shown as positive amounts.
 
 
Level 3 trading cash instruments are frequently economically hedged with level 1 and level 2 trading cash instruments and/or level 1, level 2 or level 3 derivatives. Accordingly, gains or losses that are classified in level 3 can be partially offset by gains or losses attributable to level 1 or level 2 trading cash instruments and/or level 1, level 2 or level 3 derivatives. As a result, gains or losses included in the level 3 rollforward below do not necessarily represent the overall impact on the firm’s results of operations, liquidity or capital resources.
 
Goldman Sachs March 2021 Form 10-Q 18

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
The table below presents information, by product type, for assets included in the summary table above.
 
  Three Months
Ended March
 
   
$ in millions
 
 
2021
 
   2020 
Loans and securities backed by commercial real estate
      
Beginning balance
 
 
$ 203
 
   $ 191 
Net realized gains/(losses)
 
 
1
 
   9 
Net unrealized gains/(losses)
 
 
(5
   (22
Purchases
 
 
17
 
   14 
Sales
 
 
(23
   (6
Settlements
 
 
(3
   (50
Transfers into level 3
 
 
10
 
   7 
Transfers out of level 3
 
 
(85
   (13
Ending balance
 
 
$ 115
 
   $ 130 
 
Loans and securities backed by residential real estate
 
     
Beginning balance
 
 
$ 131
 
   $ 231 
Net realized gains/(losses)
 
 
5
 
   1 
Net unrealized gains/(losses)
 
 
3
 
   7 
Purchases
 
 
24
 
   80 
Sales
 
 
(36
   (23
Settlements
 
 
(12
   (13
Transfers into level 3
 
 
104
 
   61 
Transfers out of level 3
 
 
(15
   (93
Ending balance
 
 
$ 204
 
   $ 251 
 
Corporate debt instruments
         
Beginning balance
 
 
$ 797
 
   $ 692 
Net realized gains/(losses)
 
 
26
 
   22 
Net unrealized gains/(losses)
 
 
36
 
   (132
Purchases
 
 
440
 
   238 
Sales
 
 
(217
   (214
Settlements
 
 
(114
   (80
Transfers into level 3
 
 
60
 
   242 
Transfers out of level 3
 
 
(110
   (49
Ending balance
 
 
$ 918
 
   $ 719 
 
Other
         
Beginning balance
 
 
$ 106
 
   $ 128 
Net realized gains/(losses)
 
 
1
 
   2 
Net unrealized gains/(losses)
 
 
(1
   (12
Purchases
 
 
40
 
   21 
Sales
 
 
(31
   (25
Settlements
 
 
(24
   (10
Transfers into level 3
 
 
50
 
   32 
Transfers out of level 3
 
 
(5
   (2
Ending balance
 
 
$ 136
 
   $ 134 
In the table above, other includes U.S. and
non-U.S.
government and agency obligations, other debt obligations and equity securities.
Level 3 Rollforward Commentary
Three Months Ended March 2021.
The net realized and unrealized gains on level 3 trading cash instrument assets of $66 million (reflecting $33 million of net realized gains and $33 million of net unrealized gains) for the three months ended March 2021 included gains of $28 million reported in market making and $38 million reported in interest income.
The drivers of the net unrealized gains on level 3 trading cash instrument assets for the three months ended March 2021 were not material.
Transfers into level 3 trading cash instrument assets during the three months ended March 2021 primarily reflected transfers of certain loans and securities backed by residential real estate and corporate debt instruments from level 2 (in each case, principally due to reduced price transparency as a result of a lack of market evidence, including fewer market transactions in these instruments).
Transfers out of level 3 trading cash instrument assets during the three months ended March 2021 primarily reflected transfers of certain corporate debt instruments and loans and securities backed by commercial real estate to level 2 (in each case, principally due to increased price transparency as a result of market evidence, including market transactions in these instruments).
Three Months Ended March 2020.
The net realized and unrealized losses on level 3 trading cash instrument assets of $125 million (reflecting $34 million of net realized gains and $159 million of net unrealized losses) for the three months ended March 2020 included gains/(losses) of $(4) million reported in investment banking, $(158) million reported in market making and $37 million reported in interest income.
The net unrealized losses on level 3 trading cash instrument assets for the three months ended March 2020 primarily reflected losses on certain corporate debt instruments, principally driven by weak corporate performance.
Transfers into level 3 trading cash instrument assets during the three months ended March 2020 primarily reflected transfers of certain corporate debt instruments from level 2 (principally due to reduced price transparency as a result of a lack of market evidence, including fewer market transactions in these instruments).
The drivers of transfers out of level 3 trading cash instrument assets during the three months ended March 2020 were not material.
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 traded on an exchange (exchange-traded) or they may be privately negotiated contracts, which are usually referred to as OTC derivatives. Certain of the firm’s OTC derivatives are cleared and settled through central clearing counterparties
(OTC-cleared),
while others are bilateral contracts between two counterparties (bilateral OTC).
 
19 Goldman Sachs March 2021 Form 10-Q

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
Market Making.
As a market maker, the firm enters into derivative transactions to provide liquidity to clients and to facilitate the transfer and hedging of their risks. In this role, the firm typically acts as principal and is required to commit capital to provide execution, and maintains market-making positions in response to, or in anticipation of, client demand.
Risk Management.
The firm also enters into derivatives to actively manage risk exposures that arise from its market-making and investing and financing activities. The firm’s holdings and exposures are hedged, in many cases, on either a portfolio or risk-specific basis, as opposed to an
instrument-by-instrument
basis. The offsetting impact of this economic hedging is reflected in the same business segment as the related revenues. In addition, the firm may enter into derivatives designated as hedges under U.S. GAAP. These derivatives are used to manage interest rate exposure of certain fixed-rate unsecured borrowings and deposits, as well as to manage foreign exchange risk of certain
available-for-sale
securities and the net investment in certain
non-U.S.
operations.
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 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 (counterparty netting). Derivatives are accounted for at fair value, net of cash collateral received or posted under enforceable credit support agreements (cash collateral netting). Derivative assets are included in trading assets and derivative liabilities are included in trading liabilities. Realized and unrealized gains and losses on derivatives not designated as hedges are included in market making (for derivatives included in the Global Markets segment), and other principal transactions (for derivatives included in the remaining business segments) in the consolidated statements of earnings. For both the three months ended March 2021 and March 2020, substantially all of the firm’s derivatives were included in the Global Markets segment.
The tables below present the gross fair value and the notional amounts of derivative contracts by major product type, the amounts of counterparty and cash collateral netting in the consolidated balance sheets, as well as cash and securities collateral posted and received under enforceable credit support agreements that do not meet the criteria for netting under U.S. GAAP.
 
  
As of March 2021
    As of December 2020 
      
$ in millions
 
 
Derivative
Assets
 
 
 
 
Derivative
Liabilities
 
 
 
 
  Derivative
Assets
    Derivative
Liabilities
  
Not accounted for as hedges
 
Exchange-traded
 
 
$    
 
  
 
665
 
 
 
$     1,033
 
    $        665   $        660 
OTC-cleared
 
 
16,345
 
 
 
15,133
 
    18,832   16,809 
Bilateral OTC
 
 
263,495
 
 
 
236,837
 
    337,998   304,370 
Total interest rates
 
 
280,505
 
 
 
253,003
 
    357,495   321,839 
OTC-cleared
 
 
4,855
 
 
 
5,415
 
    4,137   4,517 
Bilateral OTC
 
 
12,928
 
 
 
11,567
 
    12,418   11,551 
Total credit
 
 
17,783
 
 
 
16,982
 
    16,555   16,068 
Exchange-traded
 
 
679
 
 
 
12
 
    133   22 
OTC-cleared
 
 
372
 
 
 
431
 
    401   631 
Bilateral OTC
 
 
99,120
 
 
 
93,137
 
    101,830   102,676 
Total currencies
 
 
100,171
 
 
 
93,580
 
    102,364   103,329 
Exchange-traded
 
 
5,670
 
 
 
5,586
 
    4,476   4,177 
OTC-cleared
 
 
255
 
 
 
227
 
    195   187 
Bilateral OTC
 
 
10,663
 
 
 
13,244
 
    9,320   13,691 
Total commodities
 
 
16,588
 
 
 
19,057
 
    13,991   18,055 
Exchange-traded
 
 
33,762
 
 
 
33,855
 
    29,006   31,944 
OTC-cleared
 
 
13
 
 
 
13
 
        
Bilateral OTC
 
 
44,635
 
 
 
47,083
 
    47,867   49,072 
Total equities
 
 
78,410
 
 
 
80,951
 
    76,873   81,016 
Subtotal
 
 
493,457
 
 
 
463,573
 
    567,278   540,307 
Accounted for as hedges
 
OTC-cleared
 
 
3
 
 
 
 
    1    
Bilateral OTC
 
 
1,081
 
 
 
 
    1,346    
Total interest rates
 
 
1,084
 
 
 
 
    1,347    
OTC-cleared
 
 
58
 
 
 
48
 
       87 
Bilateral OTC
 
 
152
 
 
 
232
 
    4   372 
Total currencies
 
 
210
 
 
 
280
 
    4   459 
Subtotal
 
 
1,294
 
 
 
280
 
    1,351   459 
Total gross fair value
 
 
$ 494,751
 
 
 
$ 463,853
 
    $ 568,629   $ 540,766 
 
Offset in the consolidated balance sheets
 
Exchange-traded
 
 
$  (34,961
 
 
$  (34,961
    $  (29,549  $  (29,549
OTC-cleared
 
 
(20,016
 
 
(20,016
    (21,315  (21,315
Bilateral OTC
 
 
(306,582
 
 
(306,582
    (372,142  (372,142
Counterparty netting
 
 
(361,559
 
 
(361,559
    (423,006  (423,006
OTC-cleared
 
 
(1,553
 
 
(584
    (1,926  (720
Bilateral OTC
 
 
(62,096
 
 
(51,488
    (74,116  (58,449
Cash collateral netting
 
 
(63,649
 
 
(52,072
    (76,042  (59,169
Total amounts offset
 
 
$(425,208
 
 
$(413,631
    $(499,048  $(482,175
Included in the consolidated balance sheets
 
Exchange-traded
 
 
$     5,815
 
 
 
$     5,525
 
    $     4,731   $     7,254 
OTC-cleared
 
 
332
 
 
 
667
 
    325   196 
Bilateral OTC
 
 
63,396
 
 
 
44,030
 
    64,525   51,141 
Total
 
 
$��  69,543
 
 
 
$   50,222
 
    $   69,581   $   58,591 
 
Not offset in the consolidated balance sheets
 
Cash collateral
 
 
$      
 
(852
 
 
$    (1,842
    $       (979  $    (2,427
Securities collateral
 
 
(16,066
 
 
(6,571
    (17,297  (9,943
Total
 
 
$   52,625
 
 
 
$   41,809
 
    $   51,305   $   46,221 
 
Goldman Sachs March 2021 Form 10-Q 20

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
  Notional Amounts as of 
   
$ in millions
 
 
March
2021
 
 
   December
2020
  
Not accounted for as hedges
 
Exchange-traded
 
 
$  3,961,941
 
   $  3,722,558 
OTC-cleared
 
 
17,579,552
 
   13,789,571 
Bilateral OTC
 
 
11,834,200
 
   11,076,460 
Total interest rates
 
 
33,375,693
 
   28,588,589 
OTC-cleared
 
 
633,145
 
   515,197 
Bilateral OTC
 
 
604,166
 
   558,813 
Total credit
 
 
1,237,311
 
   1,074,010 
Exchange-traded
 
 
9,573
 
   7,413 
OTC-cleared
 
 
185,729
 
   157,687 
Bilateral OTC
 
 
6,759,515
 
   6,041,663 
Total currencies
 
 
6,954,817
 
   6,206,763 
Exchange-traded
 
 
286,649
 
   242,193 
OTC-cleared
 
 
3,857
 
   2,315 
Bilateral OTC
 
 
221,664
 
   206,253 
Total commodities
 
 
512,170
 
   450,761 
Exchange-traded
 
 
1,069,830
 
   948,937 
OTC-cleared
 
 
447
 
    
Bilateral OTC
 
 
1,228,482
 
   1,126,572 
Total equities
 
 
2,298,759
 
   2,075,509 
Subtotal
 
 
44,378,750
 
   38,395,632 
Accounted for as hedges
 
OTC-cleared
 
 
190,514
 
   182,311 
Bilateral OTC
 
 
6,463
 
   6,641 
Total interest rates
 
 
196,977
 
   188,952 
OTC-cleared
 
 
3,607
 
   1,767 
Bilateral OTC
 
 
15,178
 
   14,055 
Total currencies
 
 
18,785
 
   15,822 
Subtotal
 
 
215,762
 
   204,774 
Total notional amounts
 
 
$44,594,512
 
   $38,600,406 
In the tables above:
 
 
Gross fair values exclude the effects of both counterparty netting and collateral, and therefore are not representative of the firm’s exposure.
 
 
Where the firm has received or posted collateral under credit support agreements, but has not yet determined such agreements are enforceable, the related collateral has not been netted.
 
 
Notional amounts, which represent the sum of gross long and short derivative contracts, provide an indication of the volume of the firm’s derivative activity and do not represent anticipated losses.
 
 
Total gross fair value of derivatives included derivative assets of $22.13 billion as of March 2021 and $20.60 billion as of December 2020, and derivative liabilities of $19.56 billion as of March 2021 and $22.98 billion as of December 2020, which are not subject to an enforceable netting agreement or are subject to a netting agreement that the firm has not yet determined to be enforceable.
Fair Value of Derivatives by Level
The table below presents derivatives on a gross basis by level and product type, as well as the impact of netting.
 
$ in millions
 Level 1  Level 2  Level 3  Total 
As of March 2021
 
Assets
                
Interest rates
 
 
$    
 
7
 
 
 
$ 280,374
 
 
 
$ 1,208
 
 
 
$ 281,589
 
Credit
 
 
 
 
 
14,549
 
 
 
3,234
 
 
 
17,783
 
Currencies
 
 
 
 
 
100,200
 
 
 
181
 
 
 
100,381
 
Commodities
 
 
 
 
 
15,917
 
 
 
671
 
 
 
16,588
 
Equities
 
 
24
 
 
 
76,742
 
 
 
1,644
 
 
 
78,410
 
Gross fair value
 
 
31
 
 
 
487,782
 
 
 
6,938
 
 
 
494,751
 
Counterparty netting in levels
 
 
 
 
 
(359,470
 
 
(998
 
 
(360,468
Subtotal
 
 
$  
 
31
 
 
 
$ 128,312
 
 
 
$ 5,940
 
 
 
$ 134,283
 
Cross-level counterparty netting
             
 
(1,091
Cash collateral netting
             
 
(63,649
Net fair value
             
 
$   69,543
 
 
Liabilities
                
Interest rates
 
 
$  (29
 
 
$(252,085
 
 
$  
 
(889
 
 
$(253,003
Credit
 
 
 
 
 
(15,623
 
 
(1,359
 
 
(16,982
Currencies
 
 
 
 
 
(93,390
 
 
(470
 
 
(93,860
Commodities
 
 
 
 
 
(18,598
 
 
(459
 
 
(19,057
Equities
 
 
(39
 
 
(77,796
 
 
(3,116
 
 
(80,951
Gross fair value
 
 
(68
 
 
(457,492
 
 
(6,293
 
 
(463,853
Counterparty netting in levels
 
 
 
 
 
359,470
 
 
 
998
 
 
 
360,468
 
Subtotal
 
 
$  (68
 
 
$  (98,022
 
 
$(5,295
 
 
$(103,385
Cross-level counterparty netting
             
 
1,091
 
Cash collateral netting
             
 
52,072
 
Net fair value
             
 
$  (50,222
 
As of December 2020
                
Assets
                
Interest rates
  $ 297   
 
357,568
   $    
 
977
   
 
358,842
 
Credit
     13,104   3,451   16,555 
Currencies
     102,221   147   102,368 
Commodities
     13,285   706   13,991 
Equities
  75   75,054   1,744   76,873 
Gross fair value
  372   561,232   7,025   568,629 
Counterparty netting in levels
  (135  (420,685  (1,058  (421,878
Subtotal
  $ 237   
 
140,547
   
 
5,967
   
 
146,751
 
Cross-level counterparty netting
              (1,128
Cash collateral netting
              (76,042
Net fair value
              $   
 
69,581
 
 
Liabilities
                
Interest rates
  $(229  $
 
(320,900
  $   
 
(710
  $
 
(321,839
Credit
     (14,395  (1,673  (16,068
Currencies
     (103,303  (485  (103,788
Commodities
     (17,649  (406  (18,055
Equities
  (318  (78,122  (2,576  (81,016
Gross fair value
  (547  (534,369  (5,850  (540,766
Counterparty netting in levels
  135   420,685   1,058   421,878 
Subtotal
  $(412  $
 
(113,684
  $
 
(4,792
  $
 
(118,888
Cross-level counterparty netting
              1,128 
Cash collateral netting
              59,169 
Net fair value
              $
 
 
 
(58,591
 
21 Goldman Sachs March 2021 Form 10-Q

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
In the table above:
 
 
Gross fair values exclude the effects of both counterparty netting and collateral netting, and therefore are not representative of the firm’s exposure.
 
 
Counterparty netting is reflected in each level to the extent that receivable and payable balances are netted within the same level and is included in counterparty netting in levels. Where the counterparty netting is across levels, the netting is included in cross-level counterparty netting.
 
 
Derivative assets are shown as positive amounts and derivative liabilities are shown as negative amounts.
See Note 4 for an overview of the firm’s fair value measurement policies and the valuation techniques and significant inputs used to determine the fair value of derivatives.
Significant Unobservable Inputs
The table below presents the amount of level 3 derivative assets (liabilities), and ranges, averages and medians of significant unobservable inputs used to value level 3 derivatives.
 
  
As of March 2021
    As of December 2020 
      
$ in millions, except inputs
 
 
Amount or
Range
 
 
 
 
Average/
Median
 
 
 
 
 
 
Amount or
Range
 
 
 
 
Average/
Median
 
 
Interest rates, net
 
 
$
319
 
        $267     
Correlation
 
 
(42)% to 81%
 
 
 
48%/60%
 
    (8)% to 81%   56%/60% 
Volatility (bps)
 
 
31 to 150
 
 
 
65/53
 
    31 to 150   65/53 
Credit, net
 
 
$1,875
 
        $1,778     
Credit spreads (bps)
 
 
2 to 598
 
 
 
108/84
 
    2 to 699   109/74 
Upfront credit points
 
 
3 to 100
 
 
 
46/31
 
    7 to 90   40/30 
Recovery rates
 
 
20% to 90%
 
 
 
45%/40%
 
    25% to 90%   46%/40% 
Currencies, net
 
 
$(289)
 
        $(338)     
Correlation
 
 
20% to 70%
 
 
 
39%/41%
 
    20% to 70%   39%/41% 
Volatility
 
 
19% to 20%
 
 
 
20%/20%
 
    18% to 18%   18%/18% 
Commodities, net
 
 
$212
 
        $300     
Volatility
 
 
14% to 77%
 
 
 
29%/27%
 
    15% to 87%   32%/30% 
 
Natural gas spread
 
 
 
 
$(1.22) to
$2.27
 
 
 
 
 
$(0.11)/
$(0.07)
 
 
    $(1.00) to
$2.13
 
 
  $(0.13)/
$(0.09)
  
 
Oil spread
 
 
 
 
$10.20 to
$20.65
 
 
 
 
 
$14.87/
$14.16
 
 
    $8.30 to
$11.20
 
 
  $9.73/
$9.55
  
 
Electricity
price
 
 
 
 
$9.81 to
$72.05
 
 
 
 
 
$29.59/
$29.25
 
 
   
 
 
 
N/A
 
 
 
 
 
 
N/A
 
 
Equities, net
 
 
$(1,472)
 
        $(832)     
Correlation
 
 
(70)% to 100%
 
 
 
50%/51%
 
    (70)% to 100%   52%/55% 
Volatility
 
 
3% to 190%
 
 
 
12%/7%
 
    3% to 129%   14%/7% 
In the table above:
 
 
Derivative assets are shown as positive amounts and derivative liabilities are shown as negative amounts.
 
 
Ranges represent the significant unobservable inputs that were used in the valuation of each type of derivative.
 
Averages represent the arithmetic average of the inputs and are not weighted by the relative fair value or notional
amount
of the respective financial instruments. An average greater than the median indicates that the majority of inputs are below the average. For example, the difference between the average and the median for credit spreads indicates that the majority of the inputs fall in the lower end of the range.
 
 
The ranges, averages and medians of these inputs are not representative of the appropriate inputs to use when calculating the fair value of any one derivative. For example, the highest correlation for interest rate derivatives is appropriate for valuing a specific interest rate derivative but may not be appropriate for valuing any other interest rate derivative. Accordingly, the ranges of inputs do not represent uncertainty in, or possible ranges of, fair value measurements of level 3 derivatives.
 
 
Interest rates, currencies and equities derivatives are valued using option pricing models, credit derivatives are valued using option pricing, correlation and discounted cash flow models, and commodities derivatives are valued using option pricing and discounted cash flow models.
 
 
The fair value of any one instrument may be determined using multiple valuation techniques. For example, option pricing models and discounted cash flows models are typically used together to determine fair value. Therefore, the level 3 balance encompasses both of these techniques.
 
 
Correlation within currencies and equities includes cross-product type correlation.
 
 
Natural gas spread represents the spread per million British thermal units of natural gas.
 
 
Oil spread represents the spread per barrel of oil and refined products.
 
 
Electricity
price
represents the
price
per megawatt hour of electricity.
Range of Significant Unobservable Inputs
The following provides information about the ranges of significant unobservable inputs used to value the firm’s level 3 derivative instruments:
 
 
Correlation.
Ranges for correlation cover a variety of underliers both within one product type (e.g., equity index and equity single stock names) and across product types (e.g., correlation of an interest rate and a currency), as well as across regions. Generally, cross-product type correlation inputs are used to value more complex instruments and are lower than correlation inputs on assets within the same derivative product type.
 
Goldman Sachs March 2021 Form 10-Q 22

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
 
Volatility.
Ranges for volatility cover numerous underliers across a variety of markets, maturities and strike prices. For example, volatility of equity indices is generally lower than volatility of single stocks.
 
 
Credit spreads, upfront credit points and recovery rates.
The ranges for credit spreads, upfront credit points and recovery rates cover a variety of underliers (index and single names), regions, sectors, maturities and credit qualities (high-yield and investment-grade). The broad range of this population gives rise to the width of the ranges of significant unobservable inputs.
 
 
Commodity prices and spreads.
The ranges for commodity prices and spreads cover variability in products, maturities and delivery locations.
Sensitivity of Fair Value Measurement to Changes in Significant Unobservable Inputs
The following is a description of the directional sensitivity of the firm’s level 3 fair value measurements to changes in significant unobservable inputs, in isolation, as of each
period-end:
 
 
Correlation.
In general, for contracts where the holder benefits from the convergence of the underlying asset or index prices (e.g., interest rates, credit spreads, foreign exchange rates, inflation rates and equity prices), an increase in correlation results in a higher fair value measurement.
 
 
Volatility.
In general, for purchased options, an increase in volatility results in a higher fair value measurement.
 
 
Credit spreads, upfront credit points and recovery rates.
In general, the fair value of purchased credit protection increases as credit spreads or upfront credit points increase or recovery rates decrease. Credit spreads, upfront credit points and recovery rates are strongly related to distinctive risk factors of the underlying reference obligations, which include reference entity-specific factors, such as leverage, volatility and industry, market-based risk factors, such as borrowing costs or liquidity of the underlying reference obligation, and macroeconomic conditions.
 
 
Commodity prices and spreads.
In general, for contracts where the holder is receiving a commodity, an increase in the spread (price difference from a benchmark index due to differences in quality or delivery location) or price results in a higher fair value measurement.
Due to the distinctive nature of each of the firm’s level 3 derivatives, the interrelationship of inputs is not necessarily uniform within each product type.
Level 3 Rollforward
The table below presents a summary of the changes in fair value for level 3 derivatives.
 
  
Three Months
Ended March
 
   
$ in millions
 
 
2021
 
   2020 
Total level 3 derivatives, net
         
Beginning balance
 
 
$1,175
 
   $     25 
Net realized gains/(losses)
 
 
(98
   137 
Net unrealized gains/(losses)
 
 
40
 
   2,305 
Purchases
 
 
192
 
   223 
Sales
 
 
(908
   (413
Settlements
 
 
207
 
   41 
Transfers into level 3
 
 
(69
   (801
Transfers out of level 3
 
 
106
 
   143 
Ending balance
 
 
$  
    
645
 
   $1,660 
In the table above:
 
 
Changes in fair value are presented for all derivative assets and liabilities that are classified in level 3 as of the end of the period.
 
 
Net unrealized gains/(losses) relates to instruments that were still held at
period-end.
 
 
Transfers between levels of the fair value hierarchy are reported at the beginning of the reporting period in which they occur. If a derivative was transferred into level 3 during a reporting period, its entire gain or loss for the period is classified in level 3.
 
 
Positive amounts for transfers into level 3 and negative amounts for transfers out of level 3 represent net transfers of derivative assets. Negative amounts for transfers into level 3 and positive amounts for transfers out of level 3 represent net transfers of derivative liabilities.
 
 
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 in level 3.
 
 
Gains or losses that have been classified 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 trading cash instruments. As a result, gains/(losses) included in the level 3 rollforward below do not necessarily represent the overall impact on the firm’s results of operations, liquidity or capital resources.
 
23 Goldman Sachs March 2021 Form 10-Q

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
The table below presents information, by product type, for derivatives included in the summary table above.
 
  
Three Months
Ended March
 
   
$ in millions
 
 
2021
 
   2020 
Interest rates, net
         
Beginning balance
 
 
$   
    
267
 
   $      89 
Net realized gains/(losses)
 
 
7
 
   7 
Net unrealized gains/(losses)
 
 
111
 
   132 
Purchases
 
 
4
 
   1 
Sales
 
 
(23
   (13
Settlements
 
 
2
 
   37 
Transfers into level 3
 
 
(4
   11 
Transfers out of level 3
 
 
(45
   2 
Ending balance
 
 
$   
    
319
 
   $    266 
 
Credit, net
         
Beginning balance
 
 
$ 1,778
 
   $ 1,877 
Net realized gains/(losses)
 
 
(19
   (20
Net unrealized gains/(losses)
 
 
105
 
   652 
Purchases
 
 
42
 
   53 
Sales
 
 
(13
   (27
Settlements
 
 
(43
   (55
Transfers into level 3
 
 
(17
   11 
Transfers out of level 3
 
 
42
 
   27 
Ending balance
 
 
$ 1,875
 
   $ 2,518 
 
Currencies, net
         
Beginning balance
 
 
$  
    
(338
   $   (211
Net realized gains/(losses)
 
 
(1
   (6
Net unrealized gains/(losses)
 
 
(24
   185 
Purchases
 
 
7
 
    
Sales
 
 
(12
   (11
Settlements
 
 
63
 
   111 
Transfers into level 3
 
 
 
   (4
Transfers out of level 3
 
 
16
 
   (3
Ending balance
 
 
$  
    
(289
   $      61 
 
Commodities, net
         
Beginning balance
 
 
$   
    
300
 
   $    247 
Net realized gains/(losses)
 
 
(55
   17 
Net unrealized gains/(losses)
 
 
7
 
   197 
Purchases
 
 
20
 
   22 
Sales
 
 
(17
   (69
Settlements
 
 
(27
   (7
Transfers into level 3
 
 
 
   (11
Transfers out of level 3
 
 
(16
   (8
Ending balance
 
 
$   
    
212
 
   $    388 
 
Equities, net
         
Beginning balance
 
 
$  
    
(832
   $(1,977
Net realized gains/(losses)
 
 
(30
   139 
Net unrealized gains/(losses)
 
 
(159
   1,139 
Purchases
 
 
119
 
   147 
Sales
 
 
(843
   (293
Settlements
 
 
212
 
   (45
Transfers into level 3
 
 
(48
   (808
Transfers out of level 3
 
 
109
 
   125 
Ending balance
 
 
$(1,472
   $(1,573
Level 3 Rollforward Commentary
Three Months Ended March 2021.
The net realized and unrealized losses on level 3 derivatives of $58 million (reflecting $98 million of net realized losses and $40 million of net unrealized gains) for the three months ended March 2021 included losses of $57 million reported in market making and losses of $1 million reported in other principal transactions.
The net unrealized gains on level 3 derivatives for the three months ended March 2021 were primarily attributable to gains on certain interest rate derivatives (primarily reflecting the impact of an increase in interest rates) and gains on certain credit derivatives (primarily reflecting the impact of a widening of certain credit spreads, changes in foreign exchange rates and an increase in interest rates) partially offset by losses on certain equity derivatives (primarily reflecting the impact of an increase in equity prices).
The drivers of transfers into level 3 derivatives during the three months ended March 2021 were not material.
Transfers out of level 3 derivatives during the three months ended March 2021 primarily reflected transfers of certain equity derivative liabilities to level 2 (principally due to increased transparency of certain volatility inputs used to value these derivatives).
Three Months Ended March 2020.
The net realized and unrealized gains on level 3 derivatives of $2.44 billion (reflecting $137 million of net realized gains and $2.31 billion of net unrealized gains) for the three months ended March 2020 included gains of $2.42 billion reported in market making and $23 million reported in other principal transactions.
The net unrealized gains on level 3 derivatives for the three months ended March 2020 were primarily attributable to gains on certain equity derivatives (primarily reflecting the impact of a decrease in equity prices), gains on certain credit derivatives (primarily reflecting the impact of a decrease in interest rates and widening of certain credit spreads), gains on certain commodity derivatives (primarily reflecting the impact of a decrease in commodity prices), gains on certain currency derivatives (primarily reflecting the impact of changes in foreign exchange rates) and gains on certain interest rate derivatives (primarily reflecting a decrease in interest rates).
Transfers into level 3 derivatives during the three months ended March 2020 primarily reflected transfers of certain equity derivative liabilities from level 2 (principally due to increased significance of certain unobservable inputs used to value these derivatives).
Transfers out of level 3 derivatives during the three months ended March 2020 primarily reflected transfers of certain equity derivative liabilities to level 2 (principally due to increased transparency of certain unobservable volatility inputs used to value these derivatives).
 
Goldman Sachs March 2021 Form 10-Q 24

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
OTC Derivatives
The table below presents OTC derivative assets and liabilities by tenor and major product type.
 
$ in millions
  Less than
1 Year
    1 - 5
Years
    Greater than
5 Years
    
Total
 
As of March 2021
                
Assets
                
Interest rates
 
 
$  8,236
 
 
 
$15,696
 
 
 
$60,957
 
 
 
$  84,889
 
Credit
 
 
1,662
 
 
 
2,177
 
 
 
3,638
 
 
 
7,477
 
Currencies
 
 
16,979
 
 
 
7,745
 
 
 
8,004
 
 
 
32,728
 
Commodities
 
 
4,488
 
 
 
1,904
 
 
 
403
 
 
 
6,795
 
Equities
 
 
8,813
 
 
 
12,612
 
 
 
1,849
 
 
 
23,274
 
Counterparty netting in tenors
 
 
(3,944
 
 
(3,568
 
 
(3,052
 
 
(10,564
Subtotal
 
 
$36,234
 
 
 
$36,566
 
 
 
$71,799
 
 
 
$144,599
 
Cross-tenor counterparty netting
             
 
(17,222
Cash collateral netting
             
 
(63,649
Total OTC derivative assets
             
 
$  63,728
 
 
Liabilities
                
Interest rates
 
 
$  7,920
 
 
 
$11,835
 
 
 
$36,179
 
 
 
$  55,934
 
Credit
 
 
1,538
 
 
 
2,982
 
 
 
2,156
 
 
 
6,676
 
Currencies
 
 
16,009
 
 
 
5,941
 
 
 
4,924
 
 
 
26,874
 
Commodities
 
 
4,249
 
 
 
1,610
 
 
 
3,489
 
 
 
9,348
 
Equities
 
 
8,004
 
 
 
13,929
 
 
 
3,790
 
 
 
25,723
 
Counterparty netting in tenors
 
 
(3,944
 
 
(3,568
 
 
(3,052
 
 
(10,564
Subtotal
 
 
$33,776
 
 
 
$32,729
 
 
 
$47,486
 
 
 
$113,991
 
Cross-tenor counterparty netting
             
 
(17,222
Cash collateral netting
             
 
(52,072
Total OTC derivative liabilities
          
 
$  44,697
 
 
As of December 2020
                
Assets
                
Interest rates
  $  8,913   $20,145   $74,893   $103,951 
Credit
  822   3,270   3,302   7,394 
Currencies
  13,887   7,400   9,303   30,590 
Commodities
  2,998   1,466   488   4,952 
Equities
  12,182   12,590   1,807   26,579 
Counterparty netting in tenors
  (3,963  (4,458  (3,182  (11,603
Subtotal
  $34,839   $40,413   $86,611   $161,863 
Cross-tenor counterparty netting
              (20,971
Cash collateral netting
              (76,042
Total OTC derivative assets
              $  64,850 
 
Liabilities
                
Interest rates
  $  5,687   $11,967   $49,301   $  66,955 
Credit
  1,268   3,462   2,177   6,907 
Currencies
  18,770   7,575   5,775   32,120 
Commodities
  3,455   1,545   4,315   9,315 
Equities
  9,702   14,095   3,986   27,783 
Counterparty netting in tenors
  (3,963  (4,458  (3,182  (11,603
Subtotal
  $34,919   $34,186   $62,372   $131,477 
Cross-tenor counterparty netting
              (20,971
Cash collateral netting
              (59,169
Total OTC derivative liabilities
              $  51,337 
In the table above:
 
 
Tenor is based on remaining contractual maturity.
 
 
Counterparty netting within the same product type and tenor category is included within such product type and tenor category.
 
 
Counterparty netting across product types within the same tenor category is included in counterparty netting in tenors. Where the counterparty netting is across tenor categories, the netting is included in cross-tenor counterparty netting.
Credit Derivatives
The firm enters into a broad array of credit derivatives to facilitate client transactions and to manage the credit risk associated with market-making and investing and financing activities. Credit derivatives are actively managed based on the firm’s net risk position. Credit derivatives are generally 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.
The firm enters into the following types of credit derivatives:
 
 
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 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. If a credit event occurs, the seller of protection is required to make a payment to the buyer, calculated according to the terms of the contract.
 
 
Credit Options.
In a credit option, the option writer assumes the obligation to purchase or sell a reference obligation at a specified price or credit spread. The option purchaser buys the right, but does not assume the obligation, to sell the reference obligation to, or purchase it from, the option writer. The payments on credit options depend either on a particular credit spread or the price of the reference obligation.
 
25 Goldman Sachs March 2021 Form 10-Q

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
 
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.
 
 
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 a floating rate of interest and protection against any reduction in fair value of the reference obligation, and the protection seller receives the cash flows associated with the reference obligation, plus any increase in the fair value of the reference obligation.
The firm economically hedges its exposure to written credit derivatives primarily by entering into offsetting purchased credit derivatives with identical underliers. 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 2021, written credit derivatives had a total gross notional amount of $598.82 billion and purchased credit derivatives had a total gross notional amount of $638.50 billion, for total net notional purchased protection of $39.68 billion. As of December 2020, written credit derivatives had a total gross notional amount of $515.85 billion and purchased credit derivatives had a total gross notional amount of $558.18 billion, for total net notional purchased protection of $42.33 billion. The firm’s written and purchased credit derivatives primarily consist of credit default swaps.
The table below presents information about credit derivatives.
 
  Credit Spread on Underlier (basis points) 
      
$ in millions
 
0 - 250
  
251 -
500
  
501 -
1,000
  
Greater
than
1,000
  
Total
 
As of March 2021
                    
Maximum Payout/Notional Amount of Written Credit Derivatives by Tenor
 
Less than 1 year
 
 
$104,938
 
 
 
$  8,890
 
 
 
$    
    
787
 
 
 
$ 3,882
 
 
 
$118,497
 
1 – 5 years
 
 
347,792
 
 
 
24,907
 
 
 
7,115
 
 
 
3,173
 
 
 
382,987
 
Greater than 5 years
 
 
84,316
 
 
 
9,089
 
 
 
3,511
 
 
 
420
 
 
 
97,336
 
Total
 
 
$537,046
 
 
 
$42,886
 
 
 
$11,413
 
 
 
$ 7,475
 
 
 
$598,820
 
 
Maximum Payout/Notional Amount of Purchased Credit Derivatives
 
Offsetting
 
 
$463,033
 
 
 
$35,683
 
 
 
$  7,893
 
 
 
$ 6,966
 
 
 
$513,575
 
Other
 
 
$110,732
 
 
 
$  9,417
 
 
 
$  4,040
 
 
 
$   
    
738
 
 
 
$124,927
 
Fair Value of Written Credit Derivatives
 
Asset
 
 
$  11,208
 
 
 
$    
    
821
 
 
 
$    
    
429
 
 
 
$   
    
  60
 
 
 
$  12,518
 
Liability
 
 
762
 
 
 
1,029
 
 
 
856
 
 
 
1,932
 
 
 
4,579
 
Net asset/(liability)
 
 
$  10,446
 
 
 
$
    
  (208
 
 
$
    
  (427
 
 
$(1,872
 
 
$    7,939
 
 
As of December 2020
                    
Maximum Payout/Notional Amount of Written Credit Derivatives by Tenor
 
Less than 1 year
  $  96,049   $  5,826   $    
    
450
   $
 
2,403
   $104,728 
1 – 5 years
  331,145   17,913   8,801   4,932   362,791 
Greater than 5 years
  44,132   3,839   272   88   48,331 
Total
  $471,326   $27,578   $  9,523   $
 
7,423
   $515,850 
 
Maximum Payout/Notional Amount of Purchased Credit Derivatives
 
Offsetting
  $407,315   $19,822   $  8,679   $
 
7,091
   $442,907 
Other
  $103,604   $  7,272   $  3,619   $  
 
 776
   $115,271 
Fair Value of Written Credit Derivatives
 
Asset
  $  10,302   $     638   $     256   $  
 
 118
   $  11,314 
Liability
  1,112   1,119   387   2,001   4,619 
Net asset/(liability)
  $    9,190   $    (481  $    (131  $
 
(1,883
  $    6,695 
In the table above:
 
 
Fair values exclude the effects of both netting of receivable balances with payable balances under enforceable netting agreements, and netting of cash received or posted under enforceable credit support agreements, and therefore are not representative of the firm’s credit exposure.
 
 
Tenor is based on remaining contractual maturity.
 
 
The credit spread on the underlier, 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.
 
 
Offsetting purchased credit derivatives represent the notional amount of purchased credit derivatives that economically hedge written credit derivatives with identical underliers.
 
 
Other purchased credit derivatives represent the notional amount of all other purchased credit derivatives not included in offsetting.
 
Goldman Sachs March 2021 Form 10-Q 26

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
Impact of Credit and Funding Spreads on Derivatives
The firm realizes gains or losses on its derivative contracts. These gains or losses include credit valuation adjustments (CVA) relating to uncollateralized derivative assets and liabilities, which represents the gains or losses (including hedges) attributable to the impact of changes in credit exposure, counterparty credit spreads, liability funding spreads (which includes the firm’s own credit), probability of default and assumed recovery. These gains or losses also include funding valuation adjustments (FVA) relating to uncollateralized derivative assets, which represents the gains or losses (including hedges) attributable to the impact of changes in expected funding exposures and funding spreads.
The table below presents information about CVA and FVA.
 
   
            
   
            
 
  
  
Three Months
Ended March
 
   
$ in millions
 
 
2021
 
   2020 
CVA, net of hedges
 
 
$
    
  (108
   $     271 
FVA, net of hedges
 
 
12
 
   (759
Total
 
 
$
    
    (96
   $    (488
Bifurcated Embedded Derivatives
The table below presents the fair value and the notional amount of derivatives that have been bifurcated from their related borrowings.
 
   
            
   
            
 
  
  As of 
   
$ in millions
 
March
2021
   December
2020
 
Fair value of assets
 
 
$  1,117
 
   $  1,450 
Fair value of liabilities
 
 
(1,295
   (1,220
Net asset/(liability)
 
 
$
    
  (178
   $     230 
 
Notional amount
 
 
$12,097
 
   $12,548 
In the table above, derivatives that have been bifurcated from their related borrowings are recorded at fair value and primarily consist of interest rate, equity and commodity products. These derivatives are included in unsecured short- and long-term borrowings, as well as other secured financings, with the related borrowings.
Derivatives with Credit-Related Contingent Features
Certain of the firm’s derivatives have been transacted under bilateral agreements with counterparties who may require the firm to post collateral or terminate the transactions based on changes in the firm’s credit ratings. The firm assesses the impact of these bilateral agreements by determining the collateral or termination payments that would occur assuming a downgrade by all rating agencies. A downgrade by any one rating agency, depending on the agency’s relative ratings of the firm at the time of the downgrade, may have an impact which is comparable to the impact of a downgrade by all rating agencies.
The table below presents information about net derivative liabilities under bilateral agreements (excluding collateral posted), the fair value of collateral posted and additional collateral or termination payments that could have been called by counterparties in the event of a
one-
or
two-notch
downgrade in the firm’s credit ratings.
 
  As of 
   
$ in millions
 
 
March
2021
 
 
   December
2020
 
 
Net derivative liabilities under bilateral agreements
 
 
$35,227
 
   $43,368 
Collateral posted
 
 
$29,177
 
   $35,296 
Additional collateral or termination payments:
         
One-notch
downgrade
 
 
$    
    
192
 
   $     481 
Two-notch
downgrade
 
 
$    
    
884
 
   $  1,388 
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- and short-term borrowings and certain fixed-rate certificates of deposit, (ii) foreign exchange forward contracts used to manage the foreign exchange risk of certain
available-for-sale
securities and (iii) 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 hedging instrument 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 assess the hedging relationship at least on a quarterly basis to ensure the hedging instrument continues to be highly effective over the life of the hedging relationship.
Fair Value Hedges
The firm designates certain interest rate swaps as fair value hedges of certain fixed-rate unsecured long- and short-term debt and fixed-rate certificates of deposit. These interest rate swaps hedge changes in fair value attributable to the designated benchmark interest rate (e.g., London Interbank Offered Rate (LIBOR), Secured Overnight Financing Rate or Overnight Index Swap Rate), effectively converting a substantial portion of fixed-rate obligations into floating-rate obligations.
The firm applies a statistical method that utilizes regression analysis when assessing the effectiveness of these hedging relationships in achieving offsetting changes in the fair values of the hedging instrument and the risk being hedged (i.e., interest rate risk). An interest rate swap is considered highly effective in offsetting changes in fair value attributable to changes in the hedged risk when the regression analysis results in a coefficient of determination of 80% or greater and a slope between 80% and 125%.
 
27 Goldman Sachs March 2021 Form 10-Q

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
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 (hedging adjustment) and is also included in interest expense. When a derivative is no longer designated as a hedge, any remaining difference between the carrying value and par value of the hedged item is amortized to interest expense over the remaining life of the hedged item using the effective interest method. See Note 23 for further information about interest income and interest expense.
The table below presents the gains/(losses) from interest rate derivatives accounted for as hedges and the related hedged borrowings and deposits, and total interest expense.
 
  
Three Months
Ended March
 
   
$ in millions
 
 
2021
 
   2020 
Interest rate hedges
 
 
$(5,405
   $ 6,586 
Hedged borrowings and deposits
 
 
$ 5,185
 
   $(6,679
Interest expense
 
 
$ 1,572
 
   $ 3,437 
The table below presents the carrying value of deposits and unsecured borrowings that are designated in a hedging relationship and the related cumulative hedging adjustment (increase/(decrease)) from current and prior hedging relationships included in such carrying values.
 
$ in millions
  Carrying
Value
 
 
   
 
Cumulative
Hedging
Adjustment
 
 
 
As of March 2021
         
Deposits
 
 
$  16,036
 
  
 
$    
 
510
 
Unsecured short-term borrowings
 
 
$    3,099
 
  
 
$      
 
33
 
Unsecured long-term borrowings
 
 
$120,451
 
  
 
$  6,610
 
 
As of December 2020
         
Deposits
  $  17,303    $     649 
Unsecured short-term borrowings
  $    5,976    $       53 
Unsecured long-term borrowings
  $115,242    $11,624 
In the table above, cumulative hedging adjustment included $6.50 billion as of March 2021 and $6.34 billion as of December 2020 of hedging adjustments from prior hedging relationships that were
de-designated
and substantially all were related to unsecured long-term borrowings.
In addition, cumulative hedging adjustments for items no longer designated in a hedging relationship were $239 million as of March 2021 and $489 million as of December 2020 and substantially all were related to unsecured long-term borrowings.
In the third quarter of 2020, the firm designated certain foreign exchange forward contracts as fair value hedges of the foreign exchange risk of non-U.S. government securities classified as
available-for-sale.
See Note 8 for information about the amortized cost and fair value of such securities. The effectiveness of such hedges is assessed based on changes in spot rates. The losses on the hedges (relating to both spot and forward points) and the foreign exchange gains on the related
available-for-sale
securities were included in market making and were not material for the three months ended March 2021.
Net Investment Hedges
The firm seeks to reduce the impact of fluctuations in foreign exchange rates on its net investments 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, all gains or losses on the hedging instruments are included in currency translation.
The table below presents the gains/(losses) from net investment hedging.
 
  Three Months
Ended March
 
   
$ in millions
 
 
2021
 
   2020 
Hedges:
         
Foreign currency forward contract
 
 
$460
 
   $756 
Foreign currency-denominated debt
 
 
$265
 
   $
  
(21
Gains or losses on individual net investments in
non-U.S.
operations are reclassified to earnings from accumulated other comprehensive income/(loss) when such net investments are sold or substantially liquidated. The gross and net gains and losses on hedges and the related net investments in
non-U.S.
operations reclassified to earnings from accumulated other comprehensive income/(loss) were not material for both the three months ended March 2021 and March 2020.
The firm had designated $4.56 billion as of March 2021 and $4.97 billion as of December 2020 of foreign currency-denominated debt, included in unsecured long- and short-term borrowings, as hedges of net investments in
non-U.S.
subsidiaries.
 
Goldman Sachs March 2021 Form 10-Q 28

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
Note 8.
Investments
 
Investments includes debt instruments and equity securities that are accounted for at fair value and are generally held by the firm in connection with its long-term investing activities. In addition, investments includes debt securities classified as
available-for-sale
and
held-to-maturity
that are generally held in connection with the firm’s asset-liability management activities. Investments also consists of equity securities that are accounted for under the equity method.
The table below presents information about investments.
 
  As of 
   
$ in millions
 
 
March
2021
 
 
   December
2020
 
 
Equity securities, at fair value
 
 
$19,442
 
   $19,781 
Debt instruments, at fair value
 
 
17,743
 
   16,981 
Available-for-sale
securities, at fair value
 
 
45,179
 
   46,016 
Investments, at fair value
 
 
82,364
 
   82,778 
Held-to-maturity
securities
 
 
5,265
 
   5,301 
Equity method investments
 
 
 
387
 
   366 
Total investments
 
 
$88,016
 
   $88,445 
Equity Securities and Debt Instruments, at Fair Value
Equity securities and debt instruments, at fair value are accounted for at fair value either under the fair value option or in accordance with other U.S. GAAP, and the related fair value gains and losses are recognized in earnings.
Equity Securities, at Fair Value.
Equity securities, at fair value consists of the firm’s public and private equity-related investments in corporate and real estate entities.
The table below presents information about equity securities, at fair value.
 
  As of 
   
$ in millions
 
 
March
2021
 
 
   December
2020
 
 
Equity securities, at fair value
 
 
$19,442
 
   $19,781 
 
Equity Type
         
Public equity
 
 
13%
 
   15% 
Private equity
 
 
87%
 
   85% 
Total
 
 
100%
 
   100% 
 
Asset Class
         
Corporate
 
 
82%
 
   83% 
Real estate
 
 
18%
 
   17% 
Total
 
 
100%
 
   100% 
In the table above:
 
 
Equity securities, at fair value included investments accounted for at fair value under the fair value option where the firm would otherwise apply the equity method of accounting of $6.36 billion as of March 2021 and $7.14 billion as of December 2020. Gains recognized as a result of changes in the fair value of equity securities for which the fair value option was elected was $419 million for the three months ended March 2021 and $77 million for the three months ended March 2020. These gains are included in other principal transactions in the consolidated statements of earnings.
 
 
Equity securities, at fair value included $2.34 billion as of March 2021 and $2.35 billion as of December 2020 of investments in funds that are measured at NAV.
Debt Instruments, at Fair Value.
Debt instruments, at fair value primarily includes mezzanine, senior and distressed debt.
The table below presents information about debt instruments, at fair value.
 
  As of 
   
$ in millions
 
 
March
2021
 
 
   December
2020
 
 
Corporate debt securities
 
 
$12,038
 
   $10,991 
Securities backed by real estate
 
 
1,871
 
   1,940 
Money market instruments
 
 
1,840
 
   2,185 
Other
 
 
1,994
 
   1,865 
Total
 
 
$17,743
 
   $16,981 
In the table above:
 
 
Money market instruments primarily includes time deposits and investments in money market funds.
 
 
Other included $1.42 billion as of March 2021 and $1.31 billion as of December 2020 of investments in credit funds that are measured at NAV.
 
29 Goldman Sachs March 2021 Form 10-Q

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
Investments in Funds at Net Asset Value Per Share.
Equity securities and debt instruments, at fair value include investments in funds that are measured at NAV of the investment fund. The firm uses NAV to measure the fair value of 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 investments at fair value.
Substantially all of the firm’s investments in funds at NAV consist of investments in firm-sponsored private equity, credit, real estate and hedge funds where the firm
co-invests
with third-party investors.
Private equity funds primarily invest in a broad range of industries worldwide, including leveraged buyouts, recapitalizations, growth investments and distressed investments. Credit funds generally invest in loans and other fixed income instruments and are focused on providing private high-yield capital for leveraged and management buyout transactions, recapitalizations, financings, refinancings, acquisitions and restructurings for private equity firms, private family companies and corporate issuers. Real estate funds invest globally, primarily in real estate companies, loan portfolios, debt recapitalizations and property. Private equity, credit and real estate funds are
closed-end
funds in which the firm’s investments are generally not eligible for redemption. Distributions will be received from these funds as the underlying assets are liquidated or distributed, the timing of which is uncertain.
The firm also invests in hedge funds, primarily multi-disciplinary hedge funds that employ a fundamental
bottom-up
investment approach across various asset classes and strategies. The firm’s investments in hedge funds primarily include interests where the underlying assets are illiquid in nature, and proceeds from redemptions will not be received until the underlying assets are liquidated or distributed, the timing of which is uncertain.
Private equity, hedge and real estate funds described above are primarily “covered funds” as defined in the Volcker Rule of the U.S. Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). The Board of Governors of the Federal Reserve System (FRB) extended the conformance period to July 2022 for the firm’s investments in, and relationships with, certain legacy “illiquid funds” (as defined in the Volcker Rule) that were in place prior to December 2013. This extension is applicable to substantially all of the firm’s remaining investments in, and relationships with, such covered funds. Substantially all of the credit funds described above are not covered funds.
The table below presents the fair value of investments in funds at NAV and the related unfunded commitments.
 
$ in millions
  Fair Value of
Investments
 
 
   Unfunded
Commitments
 
 
As of March 2021
         
Private equity funds
 
 
$1,995
 
  
 
$  
    
553
 
Credit funds
 
 
1,420
 
  
 
787
 
Hedge funds
 
 
100
 
  
 
 
Real estate funds
 
 
243
 
  
 
214
 
Total
 
 
$3,758
 
  
 
$1,554
 
 
As of December 2020
   
Private equity funds
  $2,042    $   557 
Credit funds
  1,312    680 
Hedge funds
  102     
Real estate funds
  208    213 
Total
  $3,664    $1,450 
Available-for-Sale
Securities
Available-for-sale
securities are accounted for at fair value, and the related unrealized fair value gains and losses are included in accumulated other comprehensive income/(loss) unless designated in a fair value hedging relationship. See Note 7 for information about
available-for-sale
securities that are designated in a hedging relationship.
The table below presents information about
available-for-sale
securities by tenor.
 
$ in millions
  Amortized
Cost
 
 
   Fair
Value
 
 
  
 
Weighted
Average
Yield
 
 
 
As of March 2021
             
Less than 1 year
 
 
$      
 
25
 
  
 
$      
 
25
 
 
 
0.08%
 
1 year to 5 years
 
 
35,827
 
  
 
35,740
 
 
 
0.49%
 
5 years to 10 years
 
 
7,442
 
  
 
7,401
 
 
 
1.21%
 
Total U.S. government obligations
 
 
43,294
 
  
 
43,166
 
 
 
0.62%
 
 
5 years to 10 years
 
 
1,754
 
  
 
1,693
 
 
 
0.10%
 
Greater than 10 years
 
 
357
 
  
 
320
 
 
 
0.74%
 
Total non-U.S. government obligations
 
 
2,111
 
  
 
2,013
 
 
 
0.20%
 
Total
available-for-sale
securities
 
 
$45,405
 
  
 
$45,179
 
 
 
0.60%
 
 
As of December 2020
    
Less than 1 year
  $       25    $       25   0.08% 
1 year to 5 years
  35,831    36,158   0.70% 
5 years to 10 years
  7,454    7,732   1.19% 
Total U.S. government obligations
  43,310    43,915   0.78% 
 
5 years to 10 years
  1,739    1,744   0.10% 
Greater than 10 years
  353    357   0.74% 
Total
non-U.S.
government obligations
  2,092    2,101   0.21% 
Total
available-for-sale
securities
  $45,402    $46,016   0.76% 
In the table above:
 
 
Available-for-sale
securities were classified in level 1 of the fair value hierarchy as of both March 2021 and December 2020.
 
 
The firm sold
available-for-sale
securities of $10.20 billion (realized gains of $130 million) during the three months ended March 2021 and $1.45 billion (realized gains of $265 million) during the three months ended March 2020. Such gains were included in the consolidated statements of earnings.
 
Goldman Sachs March 2021 Form 10-Q 30

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
 
The gross unrealized gains included in accumulated other comprehensive income/(loss) were $262 million and the gross unrealized losses included in accumulated other comprehensive income/(loss) were $488 million as of March 2021. The gross unrealized gains included in accumulated other comprehensive income/(loss) were $631 million and the gross unrealized losses included in accumulated other comprehensive income/(loss) were not material as of December 2020.
 
 
Available-for-sale
securities are reviewed to determine if an allowance for credit losses should be recorded in the consolidated statements of earnings. The firm considers various factors in such determination, including market conditions, changes in issuer credit ratings, severity of the unrealized losses, and the intent and ability to hold the security until recovery. The firm did not record any provision for credit losses on such securities during either the three months ended March 2021 or March 2020.
Fair Value of Investments by Level
The table below presents investments accounted for at fair value by level within the fair value hierarchy.
 
$ in millions
  Level 1   Level 2   Level 3   Total 
As of March 2021
                
Government and agency obligations:
             
U.S.
 
 
$43,166
 
 
 
$         –
 
 
 
$         –
 
 
 
$43,166
 
Non-U.S.
 
 
2,015
 
 
 
49
 
 
 
 
 
 
2,064
 
Corporate debt securities
 
 
61
 
 
 
6,663
 
 
 
5,314
 
 
 
12,038
 
Securities backed by real estate
 
 
 
 
 
832
 
 
 
1,039
 
 
 
1,871
 
Money market instruments
 
 
787
 
 
 
1,053
 
 
 
 
 
 
1,840
 
Other debt obligations
 
 
 
 
 
 
 
 
523
 
 
 
523
 
Equity securities
 
 
554
 
 
 
6,377
 
 
 
10,173
 
 
 
17,104
 
Subtotal
 
 
$46,583
 
 
 
$14,974
 
 
 
$17,049
 
 
 
$78,606
 
Investments in funds at NAV
             
 
3,758
 
Total investments
             
 
$82,364
 
 
As of December 2020
                
Government and agency obligations:
             
U.S.
  $43,915   $         
 
   $         
 
   $43,915 
Non-U.S.
  2,109   48      2,157 
Corporate debt securities
  70   5,635   5,286   10,991 
Securities backed by real estate
     942   998   1,940 
Money market instruments
  781   1,404      2,185 
Other debt obligations
        497   497 
Equity securities
  517   7,270   9,642   17,429 
Subtotal
  $47,392   $15,299   $16,423   $79,114 
Investments in funds at NAV
              3,664 
Total investments
              $82,778 
See Note 4 for an overview of the firm’s fair value measurement policies and the valuation techniques and significant inputs used to determine the fair value of investments.
Significant Unobservable Inputs
The table below presents the amount of level 3 investments, and ranges and weighted averages of significant unobservable inputs used to value such investments.
 
  
As of March 2021
    As of December 2020 
      
$ in millions
 
 
Amount or
Range
 
 
 
 
Weighted
Average
 
 
       Amount or
Range
    Weighted
Average
 
 
Corporate debt securities
 
Level 3 assets
 
 
$5,314
 
        $5,286     
Yield
 
 
7.0% to 22.0%
 
 
 
9.5%
 
    4.5% to 19.5%   10.2% 
Recovery rate
 
 
9.0% to 70.0%
 
 
 
52.3%
 
    10.0% to 70.0%   50.7% 
Duration (years)
 
 
2.4 to 7.5
 
 
 
4.4
 
    3.0 to 7.7   4.2 
Multiples
 
 
0.5x to 22.4x
 
 
 
7.6x
 
    0.6x to 29.3x   6.9x 
Securities backed by real estate
 
Level 3 assets
 
 
$1,039
 
        $998     
Yield
 
 
8.3% to 20.3%
 
 
 
14.0%
 
    8.2% to 52.4%   17.5% 
Recovery rate
 
 
19.4% to 57.8%
 
 
 
32.8%
 
    21.6% to 57.8%   33.7% 
Duration (years)
 
 
0.6 to 3.0
 
 
 
1.5
 
    0.4 to 3.6   2.7 
Other debt obligations
 
Level 3 assets
 
 
$523
 
        $497     
Yield
 
 
2.2% to 9.7%
 
 
 
4.0%
 
    1.7% to 6.2%   3.5% 
Duration (years)
 
 
1.6 to 9.8
 
 
 
6.0
 
    0.2 to 10.3   6.4 
Equity securities
 
Level 3 assets
 
 
$10,173
 
        $9,642     
Multiples
 
 
0.5x to 36.6x
 
 
 
11.9x
 
    0.6x to 27.9x   9.0x 
Discount rate/yield
 
 
4.8% to 45.0%
 
 
 
14.1%
 
    4.0% to 38.5%   13.5% 
Capitalization rate
 
 
3.8% to 13.9%
 
 
 
6.2%
 
    3.7% to 14.1%   6.3% 
In the table above:
 
 
Ranges represent the significant unobservable inputs that were used in the valuation of each type of investment.
 
 
Weighted averages are calculated by weighting each input by the relative fair value of the investment.
 
 
The ranges and weighted averages of these inputs are not representative of the appropriate inputs to use when calculating the fair value of any one investment. For example, the highest multiple for private equity securities is appropriate for valuing a specific private equity security but may not be appropriate for valuing any other private equity security. Accordingly, the ranges of inputs do not represent uncertainty in, or possible ranges of, fair value measurements of level 3 investments.
 
 
Increases in yield, discount rate, capitalization rate or duration used in the valuation of level 3 investments would have resulted in a lower fair value measurement, while increases in recovery rate or multiples would have resulted in a higher fair value measurement as of both March 2021 and December 2020. Due to the distinctive nature of each level 3 investment, the interrelationship of inputs is not necessarily uniform within each product type.
 
31 Goldman Sachs March 2021 Form 10-Q

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
 
Corporate debt securities, securities backed by real estate and other debt obligations are valued using discounted cash flows, and equity securities are valued using market comparables and discounted cash flows.
 
 
The fair value of any one instrument may be determined using multiple valuation techniques. For example, market comparables and discounted cash flows may be used together to determine fair value. Therefore, the level 3 balance encompasses both of these techniques.
Level 3 Rollforward
The table below presents a summary of the changes in fair value for level 3 investments.
 
  
Three Months
Ended March
 
   
$ in millions
 
 
2021
 
   2020 
Beginning balance
 
 
$16,423
 
   $15,282 
Net realized gains/(losses)
 
 
205
 
   75 
Net unrealized gains/(losses)
 
 
1,191
 
   (1,284
Purchases
 
 
397
 
   348 
Sales
 
 
(92
   (197
Settlements
 
 
(812
   (325
Transfers into level 3
 
 
901
 
   6,480 
Transfers out of level 3
 
 
(1,164
   (971
Ending balance
 
 
$17,049
 
   $19,408 
In the table above:
 
 
Changes in fair value are presented for all investments that are classified in level 3 as of the end of the period.
 
 
Net unrealized gains/(losses) relates to investments that were still held at
period-end.
 
 
Transfers between levels of the fair value hierarchy are reported at the beginning of the reporting period in which they occur. If an investment was transferred to level 3 during a reporting period, its entire gain or loss for the period is classified in level 3.
 
 
For level 3 investments, increases are shown as positive amounts, while decreases are shown as negative amounts.
The table below presents information, by product type, for investments included in the summary table above.
 
  
Three Months
Ended March
 
   
$ in millions
 
 
2021
 
   2020 
Corporate debt securities
         
Beginning balance
 
 
$  5,286
 
   $  3,465 
Net realized gains/(losses)
 
 
151
 
   50 
Net unrealized gains/(losses)
 
 
266
 
   (465
Purchases
 
 
159
 
   69 
Sales
 
 
(73
   (174
Settlements
 
 
(435
   (166
Transfers into level 3
 
 
519
 
   4,394 
Transfers out of level 3
 
 
(559
   (24
Ending balance
 
 
$  5,314
 
   $  7,149 
 
Securities backed by real estate
         
Beginning balance
 
 
$
  
   998
 
   $     595 
Net realized gains/(losses)
 
 
17
 
   6 
Net unrealized gains/(losses)
 
 
(4
   (72
Purchases
 
 
48
 
   52 
Settlements
 
 
(107
   (12
Transfers into level 3
 
 
87
 
   206 
Ending balance
 
 
$  1,039
 
   $     775 
 
Other debt obligations
         
Beginning balance
 
 
$
  
   497
 
   $     319 
Net realized gains/(losses)
 
 
3
 
   2 
Net unrealized gains/(losses)
 
 
(1
   19 
Purchases
 
 
30
 
    
Sales
 
 
(3
    
Settlements
 
 
(3
   (2
Transfers into level 3
 
 
 
   90 
Ending balance
 
 
$  
    
  523
 
   $     428 
 
Equity securities
         
Beginning balance
 
 
$  9,642
 
   $10,903 
Net realized gains/(losses)
 
 
34
 
   17 
Net unrealized gains/(losses)
 
 
930
 
   (766
Purchases
 
 
160
 
   227 
Sales
 
 
(16
   (23
Settlements
 
 
(267
   (145
Transfers into level 3
 
 
295
 
   1,790 
Transfers out of level 3
 
 
(605
   (947
Ending balance
 
 
$10,173
 
   $11,056 
Level 3 Rollforward Commentary
Three Months Ended March 2021.
The net realized and unrealized gains on level 3 investments of $1.40 billion (reflecting $205 million of net realized gains and $1.19 billion of net unrealized gains) for the three months ended March 2021 included gains of $1.34 billion reported in other principal transactions and $61 million reported in interest income.
The net unrealized gains on level 3 investments for the three months ended March 2021 primarily reflected gains on certain private equity securities and corporate debt securities (in each case, principally driven by company-specific events and corporate performance).
 
Goldman Sachs March 2021 Form 10-Q 32

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
Transfers into level 3 investments during the three months ended March 2021 primarily reflected transfers of certain corporate debt securities and private equity securities from level 2 (in each case, principally due to reduced price transparency as a result of a lack of market evidence, including fewer market transactions in these instruments).
Transfers out of level 3 investments during the three months ended March 2021 primarily reflected transfers of certain private equity securities to level 2 (principally due to increased price transparency as a result of market evidence, including market transactions in these instruments) and transfers of certain corporate debt securities to level 2 (principally due to certain unobservable yield and duration inputs no longer being significant to the valuation of these instruments, and increased price transparency as a result of market evidence, including market transactions in these instruments).
Three Months Ended March 2020.
The net realized and unrealized losses on level 3 investments of $1.21 billion (reflecting $75 million of net realized gains and $1.28 billion of net unrealized losses) for the three months ended March 2020 included gains/(losses) of $(1.29) billion reported in other principal transactions and $77 million reported in interest income.
The net unrealized losses on level 3 investments for the three months ended March 2020 primarily reflected losses on certain private equity securities and corporate debt securities (in each case, principally driven by weak corporate performance).
Transfers into level 3 investments during the three months ended March 2020 primarily reflected transfers of certain corporate debt securities and private equity securities from level 2 (in each case, principally due to certain unobservable yield and duration inputs becoming significant to the valuation of these instruments and as a result of a lack of market evidence, including fewer transactions in these instruments).
Transfers out of level 3 investments during the three months ended March 2020 primarily reflected transfers of certain private equity securities to level 2 (principally due to increased price transparency as a result of market evidence, including market transactions in these instruments).
Held-to-Maturity
Securities
Held-to-maturity
securities are accounted for at amortized cost.
The table below presents information about
held-to-maturity
securities by type and tenor.
 
$ in millions
  Amortized
Cost
 
 
   Fair
Value
 
 
   
 
Weighted
Average
Yield
 
 
 
As of March 2021
              
Less than 1 year
 
 
$
  
 504
 
  
 
$
  
 513
 
  
 
2.53%
 
1 year to 5 years
 
 
4,041
 
  
 
4,280
 
  
 
2.30%
 
Total U.S. government obligations
 
 
4,545
 
  
 
4,793
 
  
 
2.33%
 
 
5 years to 10 years
 
 
4
 
  
 
3
 
  
 
2.59%
 
Greater than 10 years
 
 
716
 
  
 
738
 
  
 
1.09%
 
Total securities backed by real estate
 
 
720
 
  
 
741
 
  
 
1.10%
 
Total
held-to-maturity
securities
 
 
$5,265
 
  
 
$5,534
 
  
 
2.16%
 
 
As of December 2020
              
Less than 1 year
  $   501    $   513    2.53% 
1 year to 5 years
  2,529    2,695    2.34% 
5 years to 10 years
  1,531    1,675    2.25% 
Total U.S. government obligations
  4,561    4,883    2.33% 
 
5 years to 10 years
  4    3    2.56% 
Greater than 10 years
  736    751    1.08% 
Total securities backed by real estate
  740    754    1.08% 
Total
held-to-maturity
securities
  $5,301    $5,637    2.15% 
In the table above:
 
 
Substantially all of the securities backed by real estate consist of securities backed by residential real estate.
 
 
As these securities are not accounted for at fair value, they are not included in the firm’s fair value hierarchy in Notes 4 through 10. Had these securities been included in the firm’s fair value hierarchy, U.S. government obligations would have been classified in level 1 and securities backed by real estate would have been primarily classified in level 2 of the fair value hierarchy as of both March 2021 and December 2020.
 
 
The gross unrealized gains were $270 million as of March 2021 and $340 million as of December 2020. The gross unrealized losses were 0t material as of both March 2021 and December 2020.
 
 
Held-to-maturity
securities are reviewed to determine if an allowance for credit losses should be recorded in the consolidated statements of earnings. The firm considers various factors in such determination, including market conditions, changes in issuer credit ratings, historical credit losses and sovereign guarantees. Provision for credit losses on such securities was not material during the three months ended March 2021 and the firm did not record any such provision during the three months ended March 2020.
 
33 Goldman Sachs March 2021 Form 10-Q

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
Note 9.
Loans
 
Loans include (i) loans held for investment that are accounted for at amortized cost net of allowance for loan losses or at fair value under the fair value option and (ii) loans held for sale that are accounted for at the lower of cost or fair value. Interest on loans is recognized over the life of the loan and is recorded on an accrual basis.
The table below presents information about loans.
 
$ in millions
  Amortized
Cost
 
 
  Fair
Value
 
 
  Held For
Sale
 
 
  Total 
As of March 2021
                
Loan Type
                
Corporate
 
 
$  43,483
 
 
 
$  3,025
 
 
 
$  
    
987
 
 
 
$  47,495
 
Wealth management
 
 
27,804
 
 
 
7,702
 
 
 
 
 
 
35,506
 
Commercial real estate
 
 
17,016
 
 
 
1,799
 
 
 
1,847
 
 
 
20,662
 
Residential real estate
 
 
8,337
 
 
 
455
 
 
 
18
 
 
 
8,810
 
Consumer:
                
Installment
 
 
3,477
 
 
 
 
 
 
 
 
 
3,477
 
Credit cards
 
 
4,376
 
 
 
 
 
 
 
 
 
4,376
 
Other
 
 
3,622
 
 
 
501
 
 
 
327
 
 
 
4,450
 
Total loans, gross
 
 
108,115
 
 
 
13,482
 
 
 
3,179
 
 
 
124,776
 
Allowance for loan losses
 
 
(3,515
 
 
 
 
 
 
 
 
(3,515
Total loans
 
 
$104,600
 
 
 
$13,482
 
 
 
$3,179
 
 
 
$121,261
 
 
As of December 2020
                
Loan Type
                
Corporate
  $  44,778   $  2,751   $1,130   $  48,659 
Wealth management
  25,151   7,872      33,023 
Commercial real estate
  17,096   1,961   1,233   20,290 
Residential real estate
  5,236   494   20   5,750 
Consumer:
                
Installment
  3,823         3,823 
Credit cards
  4,270         4,270 
Other
  3,211   547   416   4,174 
Total loans, gross
  103,565   13,625   2,799   119,989 
Allowance for loan losses
  (3,874        (3,874
Total loans
  $  99,691   $13,625   $2,799   $116,115 
The following is a description of the loan types in the table above:
 
 
Corporate.
Corporate loans includes term loans, revolving lines of credit, letter of credit facilities and bridge loans, and are principally used for operating and general corporate purposes, or in connection with acquisitions. Corporate loans may be secured or unsecured, depending on the loan purpose, the risk profile of the borrower and other factors.
 
 
Wealth Management.
Wealth management loans includes loans extended to private bank clients, including wealth management and other clients. These loans are used to finance investments in both financial and nonfinancial assets, bridge cash flow timing gaps or provide liquidity for other needs. Substantially all of such loans are secured by securities, residential real estate, commercial real estate or other assets.
 
Commercial Real Estate.
Commercial real estate loans include originated loans (other than those extended to private bank clients) that are directly or indirectly secured by hotels, retail stores, multifamily housing complexes and commercial and industrial properties. Commercial real estate loans also includes loans extended to clients who warehouse assets that are directly or indirectly backed by commercial real estate. In addition, commercial real estate includes loans purchased by the firm.
 
 
Residential Real Estate.
Residential real estate loans primarily includes loans extended by the firm to clients (other than those extended to private bank clients) who warehouse assets that are directly or indirectly secured by residential real estate and loans purchased by the firm.
 
 
Installment.
Installment loans are unsecured and are originated by the firm.
 
 
Credit Cards.
Credit card loans are loans made pursuant to revolving lines of credit issued to consumers by the firm.
 
 
Other.
Other loans primarily includes loans extended to clients who warehouse assets that are directly or indirectly secured by consumer loans, including auto loans and private student loans. Other loans also includes unsecured consumer and credit card loans purchased by the firm.
Credit Quality
Risk Assessment.
The firm’s risk assessment process includes evaluating the credit quality of its loans. For corporate loans and a majority of wealth management, real estate and other loans, the firm performs credit reviews which include initial and ongoing analyses of its borrowers, resulting in an internal credit rating. A credit review is an independent analysis of the capacity and willingness of a borrower to meet its financial obligations and is performed on an annual basis or more frequently if circumstances change that indicate that a review may be necessary. The determination of internal credit ratings also incorporates assumptions with respect to the nature of and outlook for the borrower’s industry and the economic environment.
 
Goldman Sachs March 2021 Form 10-Q 34

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
The table below presents gross loans by an internally determined public rating agency equivalent or other credit metrics and the concentration of secured and unsecured loans.
 
$ in millions
  Investment-
Grade
 
 
  
Non-Investment-

Grade
 
 
  Other Metrics/
Unrated
 
 
  Total 
As of March 2021
                
Accounting Method
                
Amortized cost
 
 
$36,914
 
 
 
$59,595
 
 
 
$11,606
 
 
 
$108,115
 
Fair value
 
 
2,392
 
 
 
5,802
 
 
 
5,288
 
 
 
13,482
 
Held for sale
 
 
322
 
 
 
2,496
 
 
 
361
 
 
 
3,179
 
Total
 
 
$39,628
 
 
 
$67,893
 
 
 
$17,255
 
 
 
$124,776
 
 
Loan Type
    
Corporate
 
 
$10,210
 
 
 
$36,920
 
 
 
$    
    
365
 
 
 
$  47,495
 
Wealth management
 
 
24,829
 
 
 
4,995
 
 
 
5,682
 
 
 
35,506
 
Real estate:
                
Commercial
 
 
1,894
 
 
 
17,925
 
 
 
843
 
 
 
20,662
 
Residential
 
 
539
 
 
 
7,092
 
 
 
1,179
 
 
 
8,810
 
Consumer:
                
Installment
 
 
 
 
 
 
 
 
3,477
 
 
 
3,477
 
Credit cards
 
 
 
 
 
 
 
 
4,376
 
 
 
4,376
 
Other
 
 
2,156
 
 
 
961
 
 
 
1,333
 
 
 
4,450
 
Total
 
 
$39,628
 
 
 
$67,893
 
 
 
$17,255
 
 
 
$124,776
 
Secured
 
 
84%
 
 
 
92%
 
 
 
45%
 
 
 
83%
 
Unsecured
 
 
16%
 
 
 
8%
 
 
 
55%
 
 
 
17%
 
Total
 
 
100%
 
 
 
100%
 
 
 
100%
 
 
 
100%
 
 
As of December 2020
                
Accounting Method
                
Amortized cost
  $33,532   $58,250   $11,783   $103,565 
Fair value
  2,084   5,925   5,616   13,625 
Held for sale
  224   2,152   423   2,799 
Total
  $35,840   $66,327   $17,822   $119,989 
 
Loan Type
    
Corporate
  $  9,478   $38,704   $     477   $  48,659 
Wealth management
  22,098   5,331   5,594   33,023 
Real estate:
                
Commercial
  1,792   17,480   1,018   20,290 
Residential
  636   3,852   1,262   5,750 
Consumer:
                
Installment
        3,823   3,823 
Credit cards
        4,270   4,270 
Other
  1,836   960   1,378   4,174 
Total
  $35,840   $66,327   $17,822   $119,989 
Secured
  83%   90%   46%   82% 
Unsecured
  17%   10%   54%   18% 
Total
  100%   100%   100%   100% 
In the table above:
 
 Wealth management loans included in the other metrics/unrated category primarily consists of loans backed by residential real estate and securities, and real estate loans included in the other metrics/unrated category primarily consists of purchased loans. The firm’s risk assessment process for these loans includes reviewing certain key metrics, such as loan-to-value ratio, delinquency status, collateral values, expected cash flows, the Fair Isaac Corporation (FICO) credit score (which measures a borrower’s creditworthiness by considering factors such as payment and credit history) and other risk factors.
 
 For installment and credit card loans included in the other metrics/unrated category, an important credit-quality indicator is the FICO credit score. FICO credit scores are periodically refreshed by the firm to assess the updated creditworthiness of the borrower. See “Vintage” below for information about installment and credit card loans by FICO credit scores.
The firm also assigns a regulatory risk rating to its loans based on the definitions provided by the U.S. federal bank regulatory agencies. Total loans included 87% of loans as of March 2021 and 85% of loans as of December 2020 that were rated
pass/non-criticized.
 
 
35 Goldman Sachs March 2021 Form 10-Q

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
Vintage.
The tables below present gross loans accounted for at amortized cost (excluding installment and credit card loans) by an internally determined public rating agency equivalent or other credit metrics and origination year for term loans.
 
  
As of March 2021
 
     
$ in millions
 
 
Investment-
Grade
 
 
 
 
Non-Investment-

Grade
 
 
 
 

 
Other
Metrics/
Unrated
 
 
 
 
 
Total
 
2021
 
 
$     512
 
 
 
$  1,772
 
 
 
$       –
 
 
 
$    2,284
 
2020
 
 
1,878
 
 
 
6,685
 
 
 
 
 
 
8,563
 
2019
 
 
1,360
 
 
 
5,660
 
 
 
 
 
 
7,020
 
2018
 
 
1,884
 
 
 
3,237
 
 
 
 
 
 
5,121
 
2017
 
 
701
 
 
 
2,764
 
 
 
 
 
 
3,465
 
2016 or earlier
 
 
419
 
 
 
2,905
 
 
 
 
 
 
3,324
 
Revolving
 
 
2,876
 
 
 
10,685
 
 
 
145
 
 
 
13,706
 
Corporate
 
 
9,630
 
 
 
33,708
 
 
 
145
 
 
 
43,483
 
2021
 
 
189
 
 
 
40
 
 
 
101
 
 
 
330
 
2020
 
 
519
 
 
 
222
 
 
 
 
 
 
741
 
2019
 
 
719
 
 
 
431
 
 
 
 
 
 
1,150
 
2018
 
 
323
 
 
 
90
 
 
 
 
 
 
413
 
2017
 
 
374
 
 
 
31
 
 
 
 
 
 
405
 
2016 or earlier
 
 
549
 
 
 
303
 
 
 
 
 
 
852
 
Revolving
 
 
20,618
 
 
 
1,780
 
 
 
1,515
 
 
 
23,913
 
Wealth management
 
 
23,291
 
 
 
2,897
 
 
 
1,616
 
 
 
27,804
 
2021
 
 
191
 
 
 
1,411
 
 
 
1
 
 
 
1,603
 
2020
 
 
749
 
 
 
3,051
 
 
 
17
 
 
 
3,817
 
2019
 
 
76
 
 
 
1,911
 
 
 
 
 
 
1,987
 
2018
 
 
132
 
 
 
1,950
 
 
 
8
 
 
 
2,090
 
2017
 
 
26
 
 
 
1,595
 
 
 
11
 
 
 
1,632
 
2016 or earlier
 
 
 
 
 
897
 
 
 
493
 
 
 
1,390
 
Revolving
 
 
193
 
 
 
4,304
 
 
 
 
 
 
4,497
 
Commercial real estate
 
 
1,367
 
 
 
15,119
 
 
 
530
 
 
 
17,016
 
2021
 
 
 
 
 
207
 
 
 
32
 
 
 
239
 
2020
 
 
384
 
 
 
869
 
 
 
124
 
 
 
1,377
 
2019
 
 
 
 
 
45
 
 
 
235
 
 
 
280
 
2018
 
 
 
 
 
106
 
 
 
205
 
 
 
311
 
2017
 
 
8
 
 
 
53
 
 
 
144
 
 
 
205
 
2016 or earlier
 
 
 
 
 
1
 
 
 
66
 
 
 
67
 
Revolving
 
 
147
 
 
 
5,709
 
 
 
2
 
 
 
5,858
 
Residential real estate
 
 
539
 
 
 
6,990
 
 
 
808
 
 
 
8,337
 
2021
 
 
 
 
 
33
 
 
 
61
 
 
 
94
 
2020
 
 
 
 
 
75
 
 
 
444
 
 
 
519
 
2019
 
 
 
 
 
34
 
 
 
26
 
 
 
60
 
2018
 
 
 
 
 
198
 
 
 
31
 
 
 
229
 
2017
 
 
 
 
 
7
 
 
 
 
 
 
7
 
Revolving
 
 
2,087
 
 
 
534
 
 
 
92
 
 
 
2,713
 
Other
 
 
2,087
 
 
 
881
 
 
 
654
 
 
 
3,622
 
Total
 
 
$36,914
 
 
 
$59,595
 
 
 
$3,753
 
 
 
$100,262
 
 
Percentage of total
 
 
37%
 
 
 
59%
 
 
 
4%
 
 
 
100%
 
  As of December 2020 
     
$ in millions
  Investment-
Grade
 
 
  
Non-Investment-

Grade
 
 
  
 
Other
Metrics/
Unrated
 
 
 
  Total 
2020
  $  1,978   $  7,545   $   140   $  9,663 
2019
  889   6,106      6,995 
2018
  2,076   3,555      5,631 
2017
  851   3,083      3,934 
2016
  268   1,262      1,530 
2015 or earlier
  351   2,073      2,424 
Revolving
  2,662   11,891   48   14,601 
Corporate
  9,075   35,515   188   44,778 
2020
  497   313      810 
2019
  723   403      1,126 
2018
  298   87      385 
2017
  377   30      407 
2016
  22   20      42 
2015 or earlier
  531   264      795 
Revolving
  18,077   2,085   1,424   21,586 
Wealth management
  20,525   3,202   1,424   25,151 
2020
  848   3,071   55   3,974 
2019
  76   1,965      2,041 
2018
  137   2,164   25   2,326 
2017
  26   1,734   12   1,772 
2016
     165   9   174 
2015 or earlier
     775   526   1,301 
Revolving
  461   5,047      5,508 
Commercial real estate
  1,548   14,921   627   17,096 
2020
  402   976   115   1,493 
2019
     90   271   361 
2018
     123   249   372 
2017
  9   83   152   244 
2016
     1      1 
2015 or earlier
        70   70 
Revolving
  225   2,470      2,695 
Residential real estate
  636   3,743   857   5,236 
2020
  242   84   466   792 
2019
     67   29   96 
2018
     46      46 
2017
     8      8 
Revolving
  1,506   664   99   2,269 
Other
  1,748   869   594   3,211 
Total
  $33,532   $58,250   $3,690   $95,472 
 
Percentage of total
  35%   61%   4%   100% 
In the tables above, revolving loans which converted to term loans were not material as of both March 2021 and December 2020.
 
Goldman Sachs March 2021 Form 10-Q 36

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
The table below presents gross installment loans by refreshed FICO credit scores and origination year and gross credit card loans by refreshed FICO credit scores.
 
$ in millions
  Greater than or
equal to 660
 
 
   Less than 660    Total 
As of March 2021
              
2021
 
 
$
  
 
310
 
  
 
$
  
     
1
 
  
 
$
  
 
311
 
2020
 
 
1,153
 
  
 
43
 
  
 
1,196
 
2019
 
 
1,016
 
  
 
112
 
  
 
1,128
 
2018
 
 
611
 
  
 
112
 
  
 
723
 
2017
 
 
93
 
  
 
21
 
  
 
114
 
2016
 
 
4
 
  
 
1
 
  
 
5
 
Installment
 
 
3,187
 
  
 
290
 
  
 
3,477
 
Credit cards
 
 
3,397
 
  
 
979
 
  
 
4,376
 
Total
 
 
$6,584
 
  
 
$1,269
 
  
 
$7,853
 
 
Percentage of total:
              
Installment
 
 
92%
 
  
 
8%
 
  
 
100%
 
Credit cards
 
 
78%
 
  
 
22%
 
  
 
100%
 
Total
 
 
84%
 
  
 
16%
 
  
 
100%
 
 
As of
December 2020
              
2020
  $1,321    $     38    $1,359 
2019
  1,225    132    1,357 
2018
  792    150    942 
2017
  128    30    158 
2016
  6    1    7 
Installment
  3,472    351    3,823 
Credit cards
  3,398    872    4,270 
Total
  $6,870    $1,223    $8,093 
 
Percentage of total:
              
Installment
  91%    9%    100% 
Credit cards
  80%    20%    100% 
Total
  85%    15%    100% 
In the table above, credit card loans consist of revolving lines of credit.
Credit Concentrations.
The table below presents the concentration of gross loans by region.
 
$ in millions
  Carrying
Value
 
 
  Americas   EMEA   Asia   Total 
As of March 2021
                    
Corporate
 
 
$  47,495
 
 
 
57%
 
 
 
33%
 
 
 
10%
 
 
 
100%
 
Wealth management
 
 
35,506
 
 
 
88%
 
 
 
9%
 
 
 
3%
 
 
 
100%
 
Commercial real estate
 
 
20,662
 
 
 
72%
 
 
 
20%
 
 
 
8%
 
 
 
100%
 
Residential real estate
 
 
8,810
 
 
 
93%
 
 
 
5%
 
 
 
2%
 
 
 
100%
 
Consumer:
                    
Installment
 
 
3,477
 
 
 
100%
 
 
 
 
 
 
 
 
 
100%
 
Credit cards
 
 
4,376
 
 
 
100%
 
 
 
 
 
 
 
 
 
100%
 
Other
 
 
4,450
 
 
 
83%
 
 
 
16%
 
 
 
1%
 
 
 
100%
 
Total
 
 
$124,776
 
 
 
75%
 
 
 
19%
 
 
 
6%
 
 
 
100%
 
 
As of December 2020
                    
Corporate
  $  48,659   60%   31%   9%   100% 
Wealth management
  33,023   88%   10%   2%   100% 
Commercial real estate
  20,290   71%   19%   10%   100% 
Residential real estate
  5,750   88%   9%   3%   100% 
Consumer:
                    
Installment
  3,823   100%         100% 
Credit cards
  4,270   100%         100% 
Other
  4,174   81%   17%   2%   100% 
Total
  $119,989   75%   19%   6%   100% 
In the table above:
 
 
EMEA represents Europe, Middle East and Africa.
 
 
The top five industry concentrations for corporate loans as of March 2021 were
19
% for technology, media & telecommunications (17% as of December 2020),
16
% for diversified industrials (17% as of December 2020), 14% for funds (13% as of December 2020), 11% for natural resources & utilities (12% as of December 2020), and 10% for financial institutions (10% as of December 2020).
Nonaccrual and Past Due Loans.
Loans accounted for at amortized cost (other than credit card loans) are placed on nonaccrual status when it is probable that the firm will not collect all principal and interest due under the contractual terms, regardless of the delinquency status or if a loan is past due for 90 days or more, unless the loan is both well collateralized and in the process of collection. At that time, all accrued but uncollected interest is reversed against interest income and interest subsequently collected is recognized on a cash basis to the extent the loan balance is deemed collectible. Otherwise, all cash received is used to reduce the outstanding loan balance. A loan is considered past due when a principal or interest payment has not been made according to its contractual terms. Credit card loans are not placed on nonaccrual status and accrue interest until the loan is paid in full or is
charged-off.
In certain circumstances, the firm may modify the original terms of a loan agreement by granting a concession to a borrower experiencing financial difficulty, typically in the form of a modification of loan covenants, but may also include forbearance of interest or principal, payment extensions or interest rate reductions. These modifications, to the extent significant, are considered troubled debt restructurings (TDRs). Loan modifications that extend payment terms for a period of less than 90 days are generally considered insignificant and therefore not reported as TDRs.
The firm adopted the relief issued under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, as amended, and certain interpretive guidance issued by the U.S. banking agencies that provides for certain modified loans that would otherwise meet the definition of a TDR to not be classified as such. Loans accounted for at amortized cost that were not classified as TDRs as a result of this relief and interpretive guidance were 0t material as of March 2021 and were $184 million as of December 2020.
 
37 Goldman Sachs March 2021 Form 10-Q

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
The table below presents information about past due loans.
 
$ in millions
  30-89 days    90 days
or more
 
 
   Total 
As of March 2021
              
Corporate
 
 
$
  
   –
 
  
 
$  80
 
  
 
$  80
 
Wealth management
 
 
5
 
  
 
34
 
  
 
39
 
Commercial real estate
 
 
61
 
  
 
178
 
  
 
239
 
Residential real estate
 
 
4
 
  
 
20
 
  
 
24
 
Consumer:
              
Installment
 
 
30
 
  
 
13
 
  
 
43
 
Credit cards
 
 
36
 
  
 
43
 
  
 
79
 
Other
 
 
21
 
  
 
4
 
  
 
25
 
Total
 
 
$157
 
  
 
$372
 
  
 
$529
 
 
Total divided by gross loans at amortized cost
 
       
 
0.5%
 
 
As of December 2020
              
Corporate
  $
  
   –
    $294    $294 
Wealth management
  58    34    92 
Commercial real estate
  49    183    232 
Residential real estate
  4    23    27 
Consumer:
              
Installment
  42    16    58 
Credit cards
  46    31    77 
Other
  20    4    24 
Total
  $219    $585    $804 
 
Total divided by gross loans at amortized cost
 
        0.8% 
The table below presents information about nonaccrual loans.
 
  As of 
   
$ in millions
 
 
March
2021
 
 
   December
2020
 
 
Corporate
 
 
$2,321
 
   $2,651 
Wealth management
 
 
60
 
   61 
Commercial real estate
 
 
633
 
   649 
Residential real estate
 
 
21
 
   25 
Installment
 
 
47
 
   44 
Other
 
 
79
 
   122 
Total
 
 
$3,161
 
   $3,552 
 
Total divided by gross loans at amortized cost
 
 
2.9%
 
   3.4% 
In the table above:
 
 
Nonaccrual loans included $
321
 million as of March 2021 and $
533
 million as of December 2020 of loans that were 30 days or more past due.
 
 
Loans that were 90 days or more past due and still accruing were not material as of both March 2021 and December 2020.
 
 
Nonaccrual loans included $
315
 
million as of both March 2021 and December 2020 of corporate and commercial real estate loans that were modified in a troubled debt restructuring. The firm’s lending commitments related to these loans were not material as of both March 2021 and December 2020. Installment loans that were modified in a troubled debt restructuring were not material as of both March 2021 and December 2020.
Allowance for Credit Losses
The firm’s allowance for credit losses consists of the allowance for losses on loans and lending commitments accounted for at amortized cost. Loans and lending commitments accounted for at fair value or accounted for at the lower of cost or fair value are not subject to an allowance for credit losses.
To determine the allowance for credit losses, the firm classifies its loans and lending commitments accounted for at amortized cost into wholesale and consumer portfolios. These portfolios represent the level at which the firm has developed and documented its methodology to determine the allowance for credit losses. The allowance for credit losses is measured on a collective basis for loans that exhibit similar risk characteristics using a modeled approach and asset-specific basis for loans that do not share similar risk characteristics.
The allowance for credit losses takes into account the weighted average of a range of forecasts of future economic conditions over the expected life of the loan and lending commitments. The expected life of each loan or lending commitment is determined based on the contractual term adjusted for extension options or demand features. The forecasts include baseline, favorable and adverse economic scenarios over a three-year period. For loans with expected lives beyond three years, the model reverts to historical loss information based on a
non-linear
modeled approach. The forecasted economic scenarios consider a number of risk factors relevant to the wholesale and consumer portfolios described below. The firm applies judgment in weighing individual scenarios each quarter based on a variety of factors, including the firm’s internally derived economic outlook, market consensus, recent macroeconomic conditions and industry trends.
The allowance for credit losses also includes qualitative components which allow management to reflect the uncertain nature of economic forecasting, capture uncertainty regarding model inputs, and account for model imprecision and concentration risk.
 
Goldman Sachs March 2021 Form 10-Q 38

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
Management’s estimate of credit losses entails judgment about loan collectability at the reporting dates, and there are uncertainties inherent in those judgments. The allowance for credit losses is subject to a governance process that involves review and approval by senior management within the firm’s independent risk oversight and control functions. Personnel within the firm’s independent risk oversight and control functions are responsible for forecasting the economic variables that underlie the economic scenarios that are used in the modeling of expected credit losses. While management uses the best information available to determine this estimate, future adjustments to the allowance may be necessary based on, among other things, changes in the economic environment or variances between actual results and the original assumptions used.
The table below presents gross loans and lending commitments accounted for at amortized cost by portfolio.
 
  As of 
    
  
March 2021
    December 2020 
      
$ in millions
 
 
Loans
 
 
 
Lending
Commitments
 
 
       Loans   Lending
Commitments
 
 
Wholesale
                  
Corporate
 
 
$  43,483
 
 
 
$146,169
 
    $  44,778   $127,756 
Wealth management
 
 
27,804
 
 
 
3,603
 
    25,151   2,314 
Commercial real estate
 
 
17,016
 
 
 
3,736
 
    17,096   4,154 
Residential real estate
 
 
8,337
 
 
 
3,400
 
    5,236   1,804 
Other
 
 
3,622
 
 
 
4,707
 
    3,211   4,841 
Consumer
                  
Installment
 
 
3,477
 
 
 
5
 
    3,823   4 
Credit cards
 
 
4,376
 
 
 
26,491
 
    4,270   21,640 
Total
 
 
$108,115
 
 
 
$188,111
 
    $103,565   $162,513 
In the table above:
 
 
Wholesale loans included $3.11 billion as of March 2021 and $3.51 billion as of December 2020 of nonaccrual loans for which the allowance for credit losses was measured on an asset-specific basis. The allowance for credit losses on these loans was $599 million as of March 2021 and $649 million as of December 2020. These loans included $479 million as of March 2021 and $584 million as of December 2020 of loans which did not require a reserve as the loan was deemed to be recoverable.
 
 
Credit card lending commitments included $24.54 billion as of March 2021 and $21.64 
billion as of December 2020 related to credit card lines issued by the firm to consumers. These credit card lines are cancellable by the firm. Credit card lending commitments also included approximately
$2.0 billion as of March 2021 related to a commitment to acquire the General Motors co-branded credit card portfolio.
See Note 18 for further information about lending commitments.
The following is a description of the methodology used to calculate the allowance for credit losses:
Wholesale.
The allowance for credit losses for wholesale loans and lending commitments that exhibit similar risk characteristics is measured using a modeled approach. These models determine the probability of default and loss given default based on various risk factors, including internal credit ratings, industry default and loss data, expected life, macroeconomic indicators, the borrower’s capacity to meet its financial obligations, the borrower’s country of risk and industry, loan seniority and collateral type. For lending commitments, the methodology also considers probability of drawdowns or funding. In addition, for loans backed by real estate, risk factors include the
loan-to-value
ratio, debt service ratio and home price index. The most significant inputs to the forecast model for wholesale loans and lending commitments include unemployment rates, GDP, credit spreads, commercial and industrial delinquency rates, short- and long-term interest rates, and oil prices.
The allowance for loan losses for wholesale loans that do not share similar risk characteristics, such as nonaccrual loans or loans in a troubled debt restructuring, is calculated using the present value of expected future cash flows discounted at the loan’s original effective rate, the observable market price of the loan or the fair value of the collateral.
Wholesale loans are
charged-off
against the allowance for loan losses when deemed to be uncollectible.
Consumer.
The allowance for credit losses for consumer loans that exhibit similar risk characteristics is calculated using a modeled approach which classifies consumer loans into pools based on borrower-related and exposure-related characteristics that differentiate a pool’s risk characteristics from other pools. The factors considered in determining a pool are generally consistent with the risk characteristics used for internal credit risk measurement and management and include key metrics, such as FICO credit scores, delinquency status, loan vintage and macroeconomic indicators. The most significant inputs to the forecast model for consumer loans include unemployment rates and delinquency rates. The expected life of revolving credit card loans is determined by modeling expected future draws and the timing and amount of repayments allocated to the funded balance. The firm also recognizes an allowance for credit losses on commitments to acquire loans; however, no allowance for credit losses is recognized on credit card lending commitments as they are cancellable by the firm.
 
39 Goldman Sachs March 2021 Form 10-Q

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
The allowance for credit losses for consumer loans that do not share similar risk characteristics, such as loans in a troubled debt restructuring, is calculated using the present value of expected future cash flows discounted at the loan’s original effective rate.
Installment loans are
charged-off
when they are 120 days past due. Credit card loans are
charged-off
when they are 180 days past due.
Allowance for Credit Losses Rollforward
The table below presents information about the allowance for credit losses.
 
$ in millions
  Wholesale    Consumer    Total 
Three Months Ended March 2021
 
Allowance for loan losses
 
Beginning balance
 
 
$2,584
 
  
 
$1,290
 
  
 
$3,874
 
Net charge-offs
 
 
(17
  
 
(61
  
 
(78
Provision
 
 
(130
  
 
(122
  
 
(252
Other
 
 
(29
  
 
 
  
 
(29
Ending balance
 
 
$2,408
 
  
 
$1,107
 
  
 
$3,515
 
 
Allowance ratio
 
 
2.4%
 
  
 
14.1%
 
  
 
3.3%
 
Net
charge-off
ratio
 
 
0.1%
 
  
 
3.1%
 
  
 
0.3%
 
Allowance for losses on lending commitments
 
Beginning balance
 
 
$
  
 557
 
  
 
$       –
 
  
 
$
  
 557
 
Provision
 
 
2
 
   
180
    
182
 
Other
 
 
(18
  
 
 
  
 
(18
Ending balance
 
 
$
   
541
 
  
 
$
   
180
 
  
 
$
  
 721
 
 
Three Months Ended March 2020
 
Allowance for loan losses
 
Beginning balance
  $1,331    $   837    $2,168 
Net charge-offs
  (50   (81   (131
Provision
  746    169    915 
Other
  (84       (84
Ending balance
  $1,943    $   925    $2,868 
 
Allowance ratio
  1.8%    13.4%    2.5% 
Net
charge-off
ratio
  0.2%    4.8%    0.5% 
Allowance for losses on lending commitments
 
Beginning balance
  $   313    $
 
       –
    $   313 
Provision
  22        22 
Ending balance
  $   335    $
 
       –
    $   335 
In the table above:
 
 
Other represents the reduction to the allowance related to loans and lending commitments transferred to held for sale.
 
 
The allowance ratio is calculated by dividing the allowance for loan losses by gross loans accounted for at amortized cost.
 
 
The net
charge-off
ratio is calculated by dividing annualized net charge-offs by average gross loans accounted for at amortized cost.
 
The beginning balance for the allowance for loan losses and allowance for losses on lending commitments for the three months ended March 2020 reflects the cumulative effect of measuring the allowance under the CECL standard as of January 1, 2020. The cumulative effect was an increase in the allowance for credit losses of
$679
million, which consisted of (i) an increase in the allowance for loan losses
of $727 million (an increase in the allowance for wholesale loans of $452 million, an increase in the allowance for consumer loans of $444 million and a decrease in the allowance for PCI loans of $169 million) and (ii) a decrease in the allowance for lending commitments of $48 million.
As of December 2020, the allowance ratio was 2.7% for wholesale, 15.9% for consumer and 3.7% for total loans. The net
charge-off
ratio for the year ended December 2020 was 0.6% for wholesale, 4.2% for consumer and 0.9% for total loans.
Allowance for Credit Losses Rollforward Commentary
Three Months Ended March 2021.
The allowance for credit losses decreased by $195 million during the three months ended March 2021.
The provision for credit losses for wholesale and consumer loans and lending commitments reflected a reserve reduction driven by improved broader economic conditions and lower credit loss expectations, partially offset by growth in the firm’s wholesale and consumer lending portfolios, including a provision for credit losses of $180 million relating to the pending acquisition of the General Motors co-branded credit card portfolio.
When modeling expected credit losses, the firm employs a weighted, multivariate forecast, which includes baseline, adverse and favorable economic scenarios. As of March 2021, the forecasted economic scenarios were most heavily weighted towards the baseline and adverse scenarios. The forecast model incorporated adjustments to reflect the impact of the coronavirus
(COVID-19)
pandemic-related
economic support programs provided by national governments.
 
Goldman Sachs March 2021 Form 10-Q 40

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
The table below presents the forecasted range (across the baseline, adverse and favorable scenarios) of the U.S. unemployment and U.S. GDP growth rates used in the forecast model as of March 2021.
 
  
 
U.S. Unemployment
Rate
 
 
 
 
Growth/(Decline)
in U.S. GDP
 
 
Forecast for the quarter ended:
        
June 2021
 
 
5.5
% to
11.0
%
 
 
 
1.2
% to
(7.0
)%
 
December 2021
 
 
4.7% to 9.5%
 
 
 
4.8% to
(3.8
)%
 
June 2022
 
 
4.4% to 7.1%
 
 
 
6.5% to
(0.4
)%
 
In the table above:
 
 
U.S. unemployment rate represents the rate forecasted as of the respective
quarter-end.
 
 
Growth/(decline) in U.S. GDP represents the change in quarterly U.S. GDP relative to the U.S. GDP for the fourth quarter of 2019 (pre-pandemic levels).
 
 
Recovery of quarterly U.S. GDP to its
pre-pandemic
levels in the three scenarios ranges from the quarters ending June 2021 to September 2022.
 
 
While the U.S. unemployment and U.S. GDP growth rates are significant inputs to the forecast model, the model contemplates a variety of other inputs across a range of scenarios to provide a forecast of future economic conditions. Given the complex nature of the forecasting process, no single economic variable can be viewed in isolation and independently of other inputs.
Net charge-offs for the three months ended March 2021 for wholesale loans were primarily related to corporate loans and net charge-offs for consumer loans were primarily related to installment loans.
Three Months Ended March 2020.
The allowance for credit losses increased by $1.40 billion during the three months ended March 2020 reflecting $679 million relating to the impact of CECL adoption and $722 million from activity during the period.
The provision for credit losses for wholesale loans was driven by growth in the firm’s wholesale loan portfolio, asset-specific provisions relating to borrowers in the oil and gas sector, and the impact of the
COVID-19
pandemic on the broader economic outlook. The provision for credit losses on consumer loans was primarily related to seasoning of credit card loans.
Net charge-offs for wholesale loans were primarily related to corporate loans and net charge-offs for consumer loans were substantially all related to installment loans.
Fair Value of Loans by Level
The table below presents loans held for investment accounted for at fair value under the fair value option by level within the fair value hierarchy.
 
$ in millions
  Level 1    Level 2    Level 3    Total 
As of March 2021
                   
Loan Type
                   
Corporate
 
 
$  –
 
  
 
$  2,049
 
  
 
$  
 
976
 
  
 
$  3,025
 
Wealth management
 
 
 
  
 
7,639