Goldman Sachs 2003 Annual Report Download - page 36

Management’s Discussion and Analysis
34 GOLDMAN SACHS 2003 ANNUAL REPORT
England to raise interest rates by 25 basis points in
November 2003, after having lowered them by 50 basis
points earlier in the year.
asia – Japan’s economy improved during 2003. Economic
growth was supported by improved domestic spending
and continued strong export growth to China and other
Asian trading partners. Corporate profitability improved
and investment spending rose strongly through the year.
The Bank of Japan continued to provide substantial
liquidity to the market and continued to hold short-
term interest rates at zero percent through the year. The
Ministry of Finance engaged in substantial intervention
in currency markets during the year to limit the
strengthening of the yen against other major currencies.
Strengthening global and local activity pushed bond
yields significantly higher in the second half of the year.
Growth in other Asian economies improved from
midyear, after slowing in the second quarter when a
number of the region’s economies were adversely affected
by the spread of the SARS virus. As those adverse effects
dissipated and as the pace of the U.S. economic recovery
increased, growth in the region improved. China’s
growth remained very strong through 2003. While the
adverse effects of the SARS virus led to a temporary slow-
down in the Chinese economy in the second quarter, the
pace of growth accelerated sharply in the second half of
2003, driven in part by very rapid growth in investment
spending. Strong demand growth in China provided sub-
stantial support to other economies in the region and to
several global commodities markets.
CERTAIN FACTORS THAT MAY AFFECT
OUR BUSINESS
We face a variety of risks that are substantial and inher-
ent in our businesses, including market, liquidity, credit,
operational, legal and regulatory risks. For a discussion
of how management seeks to manage some of these
risks, see “— Risk Management.” A summary of some
of the important factors that could affect our business
follows below. For a further discussion of these and
other important factors that could affect our business,
see “Business—Certain Factors That May Affect Our
Business” in our Annual Report on Form 10-K for our
2003 fiscal year.
market conditions and market risk – Our businesses
are materially affected by conditions in the global finan-
cial markets and economic conditions generally.
Although business conditions improved somewhat in the
second half of 2003, in recent years we have been operating
in a very challenging environment: the number and size of
equity underwritings and mergers and acquisitions transac-
tions have declined significantly; the equities markets in
the United States and elsewhere have been volatile and at
levels below their record highs; investors have exhibited
concerns over the integrity of the U.S. financial markets as
a result of highly publicized financial and mutual fund
scandals; and the attention of management of many clients
has been diverted from capital-raising transactions and
acquisitions and dispositions in part as a result of corpo-
rate governance regulations, such as the Sarbanes-Oxley
Act of 2002, and related uncertainty in capital markets.
Adverse or uncertain economic and market conditions
have in the past adversely affected, and may in the future
adversely affect, our business and profitability in many
ways, including the following:
•Industry-wide declines in the size and number of
equity underwritings and mergers and acquisitions
and increased price competition may continue to
have an adverse effect on our revenues and,
because we may be unable to reduce expenses cor-
respondingly, our profit margins.
•We have been committing increasing amounts of
capital in many of our businesses and generally
maintain large trading, specialist and investment
positions. Market fluctuations and volatility may
adversely affect the value of those positions or
may reduce our willingness to enter into some
new transactions.
•We have been operating in a low or declining inter-
est rate market for the past several years. Increasing
or high interest rates and/or widening credit
spreads, especially if such changes are rapid, may
create a less favorable environment for certain of
our businesses.
•If any of the variety of instruments and strategies
we utilize to hedge or otherwise manage our expo-
sure 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.
•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. In our specialist busi-
nesses, we are obligated by stock exchange rules
to maintain an orderly market, including by pur-
chasing shares in a declining market. This may
result in trading losses and an increased need for
liquidity. Further weakness in global equities mar-
kets, the trading of securities in multiple markets
and on multiple exchanges, and the ongoing New
York Stock Exchange (NYSE) and Securities and