A snow-day and Goldman’s 10-K…

It’s snowing here in the northern burbs, which has given me plenty of time to brew some coffee and dig into the 10K that Goldman Sachs (GS) filed yesterday. Weighing in at 691 pages — nearly double the size of last year’s K, it’s certainly a lot to digest and we have to admit getting a bit lost in the extensive risk factors which included all sorts of new warnings on stuff that could potentially go wrong, like the financial markets melting down.

One of the recurring themes in the filing were the problems associated with increased regulation. As Goldman notes (multiple times) it’s now a bank-holding company, which means it’s subject to Federal Reserve rules. But that’s not really the biggest problem, at least according to the K. There’s the prospect, which judging by recent statements by newly confirmed Treasury Secretary Timothy Geithner and newly confirmed SEC Chair Mary Shapiro seem very real, of regulating the Credit Default Swap market. Here’s how Goldman handles that in the K:

Any regulatory effort to create an exchange or trading platform for credit derivatives and other OTC derivative contracts, or a market shift toward standardized derivatives, could reduce the risk associated with such transactions, but under certain circumstances could also limit our ability to develop derivatives that best suit the needs of our clients and ourselves and adversely affect our profitability.

And, just in case you didn’t get the gist of that entirely, Goldman repeats itself a bit further down:

Recent market disruptions have led to numerous proposals for changes in the regulation of the financial services industry, including significant additional regulation. Regulatory changes could lead to business disruptions, could impact the value of assets that we hold or the scope or profitability of our business activities, could require us to change certain of our business practices and could expose us to additional costs (including compliance costs) and liabilities

There’s plenty of other new warnings too — and some new legal disclosures, like Goldman facing various lawsuits over its underwriting of the now-bankrupt Washington Mutual. There’s also an interesting new disclosure about Goldman facing additional lawsuits from other investors as well as downsized employees because “Our experience has been that legal claims by customers and clients increase in a market downturn. In addition, employment-related claims typically increase in periods when we have reduced the total number of employees.”

So just to recap: regulation is bad, except when it saves us from imploding like Lehman.

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