Goldman Sachs 2003 Annual Report Download - page 49

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Management’s Discussion and Analysis
GOLDMAN SACHS 2003 ANNUAL REPORT 47
The following table sets forth the operating results of our Trading and Principal Investments segment:
TRADING AND PRINCIPAL INVESTMENTS OPERATING RESULTS
YEAR ENDED NOVEMBER
(IN MILLIONS) 2003 2002 2001
FICC $ 5,596 $4,680 $4,272
Equities Trading 1,738 1,008 2,923
Equities Commissions 2,543 2,994 2,603
Total Equities 4,281 4,002 5,526
Principal Investments 566 (35) (228)
Total net revenues 10,443 8,647 9,570
Operating expenses 6,938 6,505 7,310
Pre-tax earnings $ 3,505 $2,142 $2,260
(1) The equities principal strategies business includes equity arbitrage, as well as other proprietary trading in convertible bonds and derivatives.
(2) The equities product groups include primarily customer-driven activities in our shares, convertible bonds and derivatives businesses.
2003 versus 2002 – Net revenues in Trading and Principal
Investments of $10.44 billion for 2003 increased 21%
compared with 2002. FICC net revenues of $5.60 billion
increased 20% compared with 2002, primarily due to
higher net revenues in credit products, as well as
improved performances in interest rate products, com-
modities and mortgages, partially offset by lower net rev-
enues in currencies, which performed particularly well in
2002. During 2003, FICC operated in a generally favor-
able environment characterized by tightening corporate
credit spreads, low interest rates, a steep yield curve and
strong customer demand. Equities net revenues of $4.28
billion increased 7% compared with 2002, primarily due
to higher net revenues in principal strategies.(1) This
increase was partially offset by lower net revenues in our
global equities product groups(2), primarily reflecting
lower commission volumes and clearance and execution
fees in our U.S. shares business. Principal Investments
recorded net revenues of $566 million, which included an
unrealized gain related to our convertible preferred stock
investment in SMFG of $293 million (net of unrealized
foreign exchange losses on the Japanese yen-denominated
borrowing funding this investment), gains from real
estate and other corporate principal investments, as well
as the recognition of merchant banking overrides.
Operating expenses were $6.94 billion in 2003, 7%
higher than 2002, primarily due to increased compensa-
tion and benefits expenses, with higher discretionary
compensation, reflecting increased net revenues, more
than offsetting the impact of lower levels of employment.
Operating expenses also increased due to intangible asset
impairment charges in respect of option specialist rights,
higher professional services and other expenses, and
higher occupancy expenses, primarily related to exit costs
associated with reductions in our global office space.
These expense increases were partially offset by lower
communications and technology expenses, depreciation
and amortization expenses, brokerage, clearing and
exchange fees, and market development expenses, reflect-
ing the impact of reduced employment levels, lower lev-
els of business activity and continued cost-containment
discipline. Pre-tax earnings of $3.51 billion in 2003
increased 64% compared with 2002.
2002 versus 2001 – Net revenues in Trading and Principal
Investments of $8.65 billion for 2002 decreased 10%
compared with 2001. FICC net revenues of $4.68 billion
increased 10% compared with 2001, reflecting strong
performances in currencies, interest rate products and
mortgages, partially offset by decreased net revenues in
commodities. Net revenues in Equities of $4.00 billion
decreased 28% compared with 2001, primarily reflecting
lower net revenues in our global equities product
groups(2), particularly in our shares businesses, which
were affected by continued weakness in the equities
markets and the negative effect of a single block trade in
the first quarter of 2002. In addition, equity derivatives
net revenues and clearance fees within our global equities
product groups were lower. Net revenues in principal
strategies(1) also declined from 2001. Principal Invest-
ments recorded negative net revenues of $35 million,
primarily due to declines in the value of certain invest-
ments in the high technology and telecommunications
sectors, partially offset by the recognition of merchant
bank overrides and real estate and energy sector
disposition gains.
Operating expenses were $6.51 billion in 2002, 11%
lower than 2001, primarily due to decreased compensa-
tion and benefits expenses and the elimination of good-
will amortization. Market development, communications
and technology, and professional services and other
expenses also decreased in 2002, reflecting the continued
impact of expense-reduction initiatives first implemented