Goldman Sachs 2000 Annual Report Download - page 29

Other Asian economies benefited from stronger exports and
corporate investment throughout the region. However, by
year end, a slowdown in Asian electronic exports to the
United States led to a marked decline in gross domestic
product growth.
Results of Operations
The composition of our net revenues has varied over time
as financial markets and the scope of our operations have
changed. The composition of net revenues can also vary
over the shorter term due to fluctuations in U.S. and global
economic and market conditions. As a result, period-to-
period comparisons may not be meaningful.
In addition, Goldman Sachs’ conversion to corporate form in
1999 has affected, and will continue to affect, our operating
results in several significant ways. As a corporation, pay-
ments for services rendered by managing directors who,
prior to our conversion to corporate form, were profit par-
ticipating limited partners are included in compensation and
benefits expense instead of being accounted for as distrib-
utions of partners’ capital. In addition, restricted stock units
and other forms of stock-based compensation can be
awarded to employees as part of compensation. We also
record a noncash expense related to the amortization of
certain restricted stock units awarded to employees in con-
nection with our initial public offering. Furthermore, as a
corporation, our operating results are now subject to U.S.
federal, state and local corporate income taxes, and there-
fore, to a higher tax rate than we incurred as a partnership.
Certain Factors That May Affect Our
Results of Operations
As an investment banking and securities firm, our businesses
are materially affected by conditions in the financial markets
and economic conditions generally, both in the United States
and elsewhere around the world. Over the last year, the
financial markets in the United States and elsewhere have
exhibited increased volatility and a number of financial
indices have declined substantially from their record levels.
Also, it is unclear how much longer the U.S. economic expan-
sion will continue. Uncertain or unfavorable economic and
market conditions may adversely affect our businesses and
profitability in many ways, including the following:
• Market fluctuations and volatility may adversely affect
the value of our trading, specialist and investment posi-
tions, including our merchant banking and real estate
investments, and our fixed income, currency, commodity
and equity positions.
• The number and size of transactions in which we provide
underwriting, mergers and acquisitions advisory, and
other services may decline. In particular, a decline in the
investment banking services we provide to the technol-
ogy and related sectors, including communications,
media and entertainment, may adversely affect our
results of operations.
• The volume of transactions that we execute for our
customers and as a specialist may decline, which would
reduce the revenues we receive from commissions and
spreads. We may also suffer a decline in the fees we earn
for managing assets. Moreover, even in the absence of
uncertain or unfavorable economic or market condi-
tions, investment performance by our asset manage-
ment business below the performance of benchmarks or
competitors could result in a decline in assets under
management and therefore in the fees we receive.
• Concentration of risk in the past has increased the
losses that we have incurred in our arbitrage, market
making, block trading, merchant banking, underwriting
and lending businesses and may continue to do so in
the future.
• In our specialist business, we may be obligated by stock
exchange rules to maintain an orderly market by pur-
chasing shares in a declining market.
• A prolonged period of uncertain or unfavorable eco-
nomic or market conditions could impair our operating
results for a long period of time. In such a case, our
revenues may decline and, if we were unable to reduce
expenses at the same pace, our profit margins
would erode.
If any of the variety of instruments and strategies we utilize
to hedge or otherwise manage our exposure to various
types of risk are not effective, we may incur losses. Our
hedging strategies and other risk management techniques
may not be fully effective in mitigating our risk exposure in
all market environments or against all types of risk, includ-
ing risks that are unidentified or unanticipated.
Liquidity, i.e., ready access to funds, is essential to our
businesses. Our liquidity could be impaired by an inability
to access the long-term or short-term debt capital markets,
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