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GOLDMAN SACHS
2007 ANNUAL REPORT
We See Opportunity

Table of contents

  • Page 1
    We See Opportunity GOLDMAN SACHS 2007 ANNUAL REPORT

  • Page 2
    Every day, we see unique opportunities for growth - for our clients and for Goldman Sachs. With expanding markets and growing capital ï¬,ows, in countries around the world, amidst constantly shifting conditions, we see new potential and new challenges. As long-term growth and global finance ...

  • Page 3
    ... are the hallmarks of our culture. In 2007, clients both new and long-standing, in markets both emerging and well-established, have valued Goldman Sachs' deep understanding of the everchanging global markets as a source of advice and outstanding execution. Goldman Sachs 2007 Annual Report 1

  • Page 4
    Lloyd Blankfein, Chairman and Chief Executive Officer

  • Page 5
    ... firm also returned $9 billion of capital to shareholders by repurchasing 41 million shares of our common stock. Book value per common share increased 25 percent during 2007, and has grown from $20.94 at the Gary D. Cohn, President and Co-Chief Operating Officer Goldman Sachs 2007 Annual Report 3

  • Page 6
    ... Authority. During the same period, we priced an $896 million equity offering for Apollo Management on our innovative GSTrUE platform, which we developed earlier in the year. GSTrUE pioneered the offering and trading of privately placed securities, bringing 4 Goldman Sachs 2007 Annual Report

  • Page 7
    ... the term "BRICs," we identified early on the breakout potential of the high-growth countries of Brazil, Russia, India and China. Historically, however, we have not built much physical infrastructure in the emerging markets. That changed in the last two years as we opened offices in Mumbai, Moscow...

  • Page 8
    ... events over the last year. The priority we place on recruiting is one reason why more than 80 percent of the offers we extended globally to undergraduates and graduates in 2007 were accepted. Once they come into the firm, our people expect ongoing training and development. Within GS University...

  • Page 9
    .... Goldman Sachs Gives Not surprisingly, the culture of our firm anchors our approach to risk management. That approach is characterized by accountability, escalation and communication. A large part of this discipline is represented in the marking process, which assigns value to a position based...

  • Page 10
    ... of non-profit organizations around the world. Looking Ahead Behind the hard numbers of financial performance is an internal set of shared values at Goldman Sachs. These values fuel a culture of teamwork and the rigor of our risk management. We will make our fair share of mistakes and we will...

  • Page 11
    ..., except per share amounts) 2007 2006 2005 Operating Results Net revenues Investment banking Trading and principal investments Asset management and securities services Total net revenues Pre-tax earnings Net earnings Net earnings applicable to common shareholders Common Share Data Diluted earnings...

  • Page 12
    10 Goldman Sachs 2007 Annual Report

  • Page 13
    ... publicly traded entity. In preparation for the IPO, Goldman Sachs worked with the BOVESPA Holding management board to develop a profile that would appeal to a broad base of international investors. Key to the success of the offering was helping them demonstrate how their evolving culture supported...

  • Page 14
    12 Goldman Sachs 2007 Annual Report

  • Page 15
    ..., such as funding further growth, but not wanting to list on an exchange as a publicly traded company. Potential investors are always looking for strong opportunities, but also value the liquidity and pricing transparency that a trading market can provide. In 2007, Goldman Sachs took several steps...

  • Page 16
    ...with GE Plastics' globally recognized brands, unparalleled access to the industry's most important customers and market-leading productdevelopment skills helped create a new global market leader in high-performance plastics, renamed SABIC Innovative Plastics. Goldman Sachs understood the value of GE...

  • Page 17
    Goldman Sachs 2007 Annual Report 15

  • Page 18
    16 Goldman Sachs 2007 Annual Report

  • Page 19
    ...see opportunity In new relationships ICICI Bank Limited has established itself as one of the financial leaders of the fast growing Indian economy. To fund its growth, ICICI selected Goldman Sachs to lead manage its $4.9 billion equity offering - the largest equity offering in history by an Indian...

  • Page 20
    18 Goldman Sachs 2007 Annual Report

  • Page 21
    ... Company Limited (TSMC) is a perfect example. Since leading their first international equity offering over 10 years ago, Goldman Sachs has played a role in virtually every significant market transaction TSMC has undertaken, totaling over $12 billion. At the beginning of 2007, Goldman Sachs worked...

  • Page 22
    20 Goldman Sachs 2007 Annual Report

  • Page 23
    ... cash alternatives to accelerate the restructuring process. This included involvement by numerous creditors, multiple financial advisors, the French and U.K. governments, and specialty monoline insurance companies. In the end, Goldman Sachs and bank partners funded £2.84 billion in new capital...

  • Page 24
    22 Goldman Sachs 2007 Annual Report

  • Page 25
    ...professionals from Investment Banking, the Financing Group, Credit Products, Commodities and our Center for Environmental Markets helped execute the transaction and related financing in the midst of turbulent markets and a high-profile public debate. Goldman Sachs served as financial advisor, led...

  • Page 26
    24 Goldman Sachs 2007 Annual Report

  • Page 27
    ...standing client of Goldman Sachs. Most recently, they asked us to help analyze strategic options for Marmon Holdings, Inc., one of their significant investments. An international grouping of more than 125 manufacturing and service businesses, Marmon has achieved impressive growth and profitability...

  • Page 28
    ... a common ground Goldman Sachs' relationship with the New York Yankees dates to 2001. The following year, together we launched what would become the #1 most watched regional sports network in the country, the YES Network. The deal marked one of the largest private equity investments at the time...

  • Page 29
    Goldman Sachs 2007 Annual Report 27

  • Page 30
    ... Sarah C. Lawlor Technology Akio Shima Investment Banking Miyuki Matsumoto Fixed Income, Currency and Commodities Operations Hiroko Imaeda Global Investment Research Ricky Ho Investment Management Equities Technology Janet Kong Investment Management 28 Goldman Sachs 2007 Annual Report

  • Page 31

  • Page 32
    ... global financing needs. Our Financing Group teams work closely with corporate clients, pension funds, financial sponsors and governments to structure and execute complex financing and risk management solutions. Drawing upon expertise from across the firm, solutions may include equity, debt...

  • Page 33
    ...solutions from Goldman Sachs is increasing. Whether it be for specialty lending products, financing solutions for the energy industry or credit solutions for individual investors, our financing specialists around the world are actively engaged in helping clients achieve their goals. LEFT New York...

  • Page 34
    ... in our Private Equity Group, we offer clients access to a strong selection of global external diversified funds of funds, structured portfolios and liquidity solutions. With a strong position in the global markets and access to the most significant issuers and investors, our investment teams have...

  • Page 35

  • Page 36
    ... people of Goldman Sachs share a set of values that creates our unique culture of excellence. Our culture is what sets us apart from other firms. It is what earns us our reputation, helps define our brand and makes Goldman Sachs a rewarding place to work. It is a culture that expects the best from...

  • Page 37
    ...Currency and Commodities Liz Beshel Fixed Income, Currency and Commodities Miho Kusaka Finance Steve Strongin Technology Yoshiaki Hashimoto Global Investment Research Lisa Shalett Investment Banking Global Compliance Tracy Wolstencroft Investment Banking Goldman Sachs 2007 Annual Report 35

  • Page 38
    ... and individuals worldwide and provide prime brokerage services, financing services and securities lending services to institutional clients, including hedge funds, mutual funds, pension funds and foundations, and to high-net-worth individuals worldwide. 36 Goldman Sachs 2007 Annual Report

  • Page 39
    ... Management ...68 Risk Management Structure ...68 Market Risk ...69 Credit Risk ...73 Derivatives ...73 Liquidity and Funding Risk ...76 Operational Risk ...81 Recent Accounting Developments ...82 Management's Report on Internal Control over Financial Reporting ...84 Report of Independent Registered...

  • Page 40
    ... major asset classes to a diverse group of institutions and individuals worldwide and provide prime brokerage services, financing services and securities lending services to institutional clients, including hedge funds, mutual funds, pension funds and foundations, and to high-net-worth individuals...

  • Page 41
    ... fiscal year, while net revenues in equity underwriting were strong but essentially unchanged from 2006. Our investment banking transaction backlog at the end of 2007 was higher than it was at the end of 2006. (1) Net revenues in Asset Management and Securities Services also increased. The increase...

  • Page 42
    ... loans and securities. The broader global credit markets were characterized by significant weakness in the second half of the year, which was evident in the significant dislocation in money market rates in the U.S. and Europe. The U.S. Federal Reserve lowered its federal funds target rate towards...

  • Page 43
    ... in the cost of credit and capital; increases in inï¬,ation, interest rates, exchange rate volatility, default rates or the price of basic commodities; corporate, political or other scandals that reduce investor MARKET CONDITIONS AND MARKET RISK. â-  â-  Goldman Sachs 2007 Annual Report 41

  • Page 44
    ... us to find other sources of financing or to make significant cash payments or securities movements. For a discussion of the potential impact on Goldman Sachs of a reduction in our credit ratings, see "- Liquidity and Funding Risk - Credit Ratings" below. 42 Goldman Sachs 2007 Annual Report

  • Page 45
    ...positions) are marked to offer prices. We adopted Statement of Financial Accounting Standards (SFAS) No. 157, "Fair Value Measurements," as of the beginning of 2007. See Notes 2 and 3 to the consolidated financial statements for further information on SFAS No. 157. Goldman Sachs 2007 Annual Report...

  • Page 46
    ...of $4.30 billion and $3.28 billion as of November 2007 and November 2006, respectively, held by investment funds managed by Goldman Sachs. The fair value of our investment in the ordinary shares of Industrial and Commercial Bank of China Limited (ICBC), which trade on The Stock Exchange of Hong Kong...

  • Page 47
    ... transfer the remaining shares after October 20, 2009. A portion of our interest is held by investment funds managed by Goldman Sachs. We also have an investment in the convertible preferred stock of SMFG. This investment is valued using a model that is principally based on SMFG's common stock price...

  • Page 48
    ..., prepayment rates and correlations of such inputs. For OTC derivatives that trade in liquid markets, such as generic forwards, swaps and options, model inputs can generally be verified and model selection does not involve significant management judgment. 46 Goldman Sachs 2007 Annual Report

  • Page 49
    ... real estate collateral. (5) Includes (6) Consists (7) We do not bear economic exposure to these level 3 assets as they are financed by nonrecourse debt, attributable to minority investors or attributable to employee interests in certain consolidated funds. Goldman Sachs 2007 Annual Report 47

  • Page 50
    ...ed as level 3 within the fair value hierarchy), including $316 million of collateralized debt obligations (CDOs) backed by subprime mortgages. At any point in time, we may use cash instruments as well as derivatives to manage our long or short risk position in the subprime mortgage market. SUBPRIME...

  • Page 51
    ... Assets by Asset Class As of November 2007 Range of Estimated Remaining Useful Lives (in years) 2006 ($ in millions) Carrying Value Carrying Value Customer lists (1) New York Stock Exchange (NYSE) specialist rights Insurance-related assets (2) Exchange-traded fund (ETF) specialist rights...

  • Page 52
    ... historical trends; the NYSE will be able to recapture approximately one-half of the market share that it lost in 2007; and we will increase the market share of our NYSE specialist business and, as a DMM, the profitability of each share traded. â-  â-  50 Goldman Sachs 2007 Annual Report

  • Page 53
    ... changed. The composition of net revenues can also vary over the shorter term due to ï¬,uctuations in U.S. and global economic and market conditions. See "- Certain Risk Factors That May Affect Our Business" above, and "Risk Factors" in Part I, Item 1A of the Annual Report on Form 10-K. Financial...

  • Page 54
    ... Banking, and Asset Management and Securities Services. The increase in Trading and Principal Investments reï¬,ected significantly higher net revenues in FICC, Equities and Principal Investments. The increase in FICC reï¬,ected particularly strong performances across all major businesses. During...

  • Page 55
    ... these consolidated entities in order to evaluate trends in non-compensation expenses related to our principal business activities. Revenues related to such entities are included in "Trading and principal investments" in the consolidated statements of earnings. Goldman Sachs 2007 Annual Report 53

  • Page 56
    ...2006 included $637 million in continued amortization of prior year awards held by employees that were retirement-eligible on the date of adoption of SFAS No. 123-R. This amount represents the majority of the expense to be recognized with respect to these awards. 54 Goldman Sachs 2007 Annual Report

  • Page 57
    ... and acquisitions, divestitures, corporate defense activities, restructurings and spin-offs. FINANCIAL ADVISORY. â-  Underwriting includes public offerings and private placements of a wide range of securities and other financial instruments. UNDERWRITING. Goldman Sachs 2007 Annual Report 55

  • Page 58
    ... preferred stock, mortgage-backed securities, asset-backed securities and taxable municipal debt. Includes publicly registered and Rule 144A issues. (2) Includes (3) Includes Net revenues in Investment Banking of $7.56 billion for 2007 increased 34% compared with 2006. Net revenues in Financial...

  • Page 59
    ... period. Net revenues from Principal Investments do not include management fees generated from our merchant banking funds. These management fees are included in the net revenues of the Asset Management and Securities Services segment. â-  We make markets in and trade equities and equityrelated...

  • Page 60
    ... higher equity prices and favorable market opportunities, although volatility levels were generally low. Principal Investments recorded net revenues of $2.82 billion for 2006, reï¬,ecting a $937 million gain related to our investment in the ordinary shares of ICBC, a $527 million gain related to...

  • Page 61
    ... services and securities lending services to institutional clients, including hedge funds, mutual funds, pension funds and foundations, and to high-net-worth individuals worldwide, and generates revenues primarily in the form of interest rate spreads or fees. Assets under management typically...

  • Page 62
    ... net asset inï¬,ows in connection with our acquisition of Macquarie - IMM Investment Management. the transfer of $8 billion of money market assets under management to interest-bearing deposits at GS Bank USA. These deposits are not included in assets under management. 60 Goldman Sachs 2007 Annual...

  • Page 63
    ... client securitization transactions; providing secondary market liquidity; making investments in performing and nonperforming debt, equity, real estate and other assets; providing investors with credit-linked and asset-repackaged notes; and receiving or providing letters of credit to satisfy margin...

  • Page 64
    ... broker-dealer, is subject to minimum capital requirements imposed by Japan's Financial Services Agency. Several other subsidiaries of Goldman Sachs are regulated by securities, investment advisory, banking, insurance, and other regulators and authorities around the world. As of November 2007...

  • Page 65
    ... repurchase program, see "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities" in Part ll, Item 5 of the Annual Report on Form 10-K. As of November 2007, Goldman Sachs had 124,000 shares of perpetual non-cumulative preferred stock issued and...

  • Page 66
    ... to trusts, we had other outstanding subordinated debt of $11.23 billion as of November 2007. Although not part of our shareholders' equity, subordinated debt may be used to meet a portion of our consolidated capital requirements as a CSE. SUBORDINATED DEBT. 64 Goldman Sachs 2007 Annual Report

  • Page 67
    Management's Discussion and Analysis Capital Ratios and Metrics The following table sets forth information on our assets, shareholders' equity, leverage ratios and book value per common share: As of November ($ in millions, except per share amounts) 2007 2006 The following table sets forth the ...

  • Page 68
    ... to acquire Litton, the mortgage servicing unit of Credit-Based Asset Servicing and Securitization LLC (C-BASS). The transaction closed in December 2007 at a purchase price of $428 million, plus repayment of $916 million of outstanding Litton debt obligations. 66 Goldman Sachs 2007 Annual Report

  • Page 69
    ... 2007 and residential mortgages and mortgage-backed securities, corporate bank loans and commercial mortgages as of November 2006. See Note 6 to the consolidated financial statements for further information regarding our commitments, contingencies and guarantees. Goldman Sachs 2007 Annual Report...

  • Page 70
    ... Risk Committee provides oversight of the ongoing development and implementation of our operational risk policies, framework and methodologies, and monitors the effectiveness of operational risk management. O P E R AT I O N A L R I S K C O M M I T T E E . 68 Goldman Sachs 2007 Annual Report

  • Page 71
    ... owned, at fair value" and "Financial instruments sold, but not yet purchased, at fair value" in the consolidated statements of financial condition. These tools include: â-  risk limits based on a summary measure of market risk exposure referred to as VaR; Goldman Sachs 2007 Annual Report 69

  • Page 72
    ...2005. We increased our level of exposure across all risk categories, particularly equity prices and interest rates. Daily VaR (in millions) As of November Risk Categories 2007 2006 Year Ended November 2007 High Low Interest rates Equity prices Currency rates Commodity prices Diversification effect...

  • Page 73
    ...Trading Net Revenues As part of our overall risk control process, daily trading net revenues are compared with VaR calculated as of the end of the prior business day. Trading losses incurred on a single day exceeded our 95% one-day VaR on ten occasions during 2007. Goldman Sachs 2007 Annual Report...

  • Page 74
    ...capital markets, and changes in financial ratios or cash ï¬,ows. The sensitivity analysis of our investment in the ordinary shares of ICBC excludes interests held by investment funds managed by Goldman Sachs. The sensitivity analysis of our investment in the convertible preferred stock of SMFG, net...

  • Page 75
    ... execute a high volume of transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment funds and other institutional clients, resulting in significant credit concentration with respect to this industry. In the ordinary course...

  • Page 76
    ... Commodities Equities Total (1) Includes $ 2,807 6,859 3,078 3,235 $15,979 $1,242 1,290 658 1,682 $4,872 $ 6,064 2,582 4,253 2,615 $15,514 $ 3,582 494 1,643 3,239 $ 8,958 $5,138 634 273 277 $6,322 $18,833 11,859 9,905 11,048 $51,645 credit derivatives. 74 Goldman Sachs 2007 Annual Report

  • Page 77
    ...we have obtained collateral from a counterparty under a master trading agreement that covers multiple products and transactions, we have allocated the collateral ratably based on exposure before giving effect to such collateral. credit derivatives. (2) Includes Goldman Sachs 2007 Annual Report 75

  • Page 78
    ... the form of unencumbered, highly liquid securities that may be sold or pledged to provide same-day liquidity. This "Global Core Excess" liquidity is intended to allow us to meet immediate obligations without needing to sell other assets or depend on additional funding from credit-sensitive markets...

  • Page 79
    ...â-  â-  â-  Global Core Excess excludes liquid assets of $6.17 billion held separately by William Street Funding Corporation. See "- Contractual Obligations and Commitments" above for a further discussion of the William Street credit extension program. Goldman Sachs 2007 Annual Report 77

  • Page 80
    ... other asset-backed loans and securities (1) Bank loans (2) High-yield securities Emerging market debt securities Private equity and real estate fund investments (3) Emerging market equity securities ICBC ordinary shares (4) SMFG convertible preferred stock Other restricted public equity securities...

  • Page 81
    ... rates and foreign exchange movements. For a discussion of factors that could impair our ability to access the capital markets, see " - Certain Risk Factors That May Affect Our Business" above as well as "Risk Factors" in Part I, Item 1A of the Annual Report on Form 10-K. Goldman Sachs 2007 Annual...

  • Page 82
    ..., directly or indirectly, to its regulated subsidiaries; for example, as of November 2007, Group Inc. had $24.49 billion of such equity and subordinated indebtedness invested in Goldman, Sachs & Co., its principal U.S. registered broker-dealer; $27.51 billion invested in Goldman Sachs International...

  • Page 83
    Management's Discussion and Analysis The following table sets forth our unsecured credit ratings as of November 2007: Short-Term Debt Long-Term Debt Subordinated Debt Preferred Stock Dominion Bond Rating Service Limited Fitch, Inc. Moody's Investors Service Standard & Poor's Rating and Investment ...

  • Page 84
    ...firm commitment. Subsequent changes in fair value must be recorded in earnings. Additionally, SFAS No. 159 allows for a one-time election for existing positions upon adoption, with the transition adjustment recorded to beginning retained earnings. SFAS NO. 159. 82 Goldman Sachs 2007 Annual Report

  • Page 85
    ...: â-  certain unsecured short-term borrowings, consisting of all promissory notes and commercial paper; certain other secured financings, primarily transfers accounted for as financings rather than sales under SFAS No. 140 and debt raised through our William Street program; certain unsecured...

  • Page 86
    ... over Financial Reporting Management of The Goldman Sachs Group, Inc., together with its consolidated subsidiaries (the firm), is responsible for establishing and maintaining adequate internal control over financial reporting. The firm's internal control over financial reporting is a process...

  • Page 87
    Report of Independent Registered Public Accounting Firm To the Board of Directors and the Shareholders of The Goldman Sachs Group, Inc.: In our opinion, the accompanying consolidated statements of financial condition and the related consolidated statements of earnings, changes in shareholders' ...

  • Page 88
    ...banking Trading and principal investments Asset management and securities services Interest income Total revenues Interest expense Revenues, net of interest expense Operating expenses Compensation and benefits Brokerage, clearing, exchange and distribution fees Market development Communications and...

  • Page 89
    ...' equity Unsecured short-term borrowings, including the current portion of unsecured long-term borrowings (includes $48,331 and $10,220 at fair value as of November 2007 and November 2006, respectively) Bank deposits (includes $463 at fair value as of November 2007) Payables to brokers, dealers and...

  • Page 90
    ... fee related to automatic preferred enhanced capital securities Preferred stock issuance costs Excess net tax benefit related to share-based compensation Cash settlement of share-based compensation Balance, end of year Retained earnings Balance, beginning of year, as previously reported Cumulative...

  • Page 91
    ... Share-based compensation Changes in operating assets and liabilities Cash and securities segregated for regulatory and other purposes Net receivables from brokers, dealers and clearing organizations Net payables to customers and counterparties Securities borrowed, net of securities loaned Financial...

  • Page 92
    ...gains/(losses) on available-for-sale securities, net of tax Comprehensive income $11,599 39 38 (2) (12) $11,662 $9,537 45 (27) (7) 10 $9,558 $5,626 (27) (11) 9 18 $5,615 The accompanying notes are an integral part of these consolidated financial statements. 90 Goldman Sachs 2007 Annual Report

  • Page 93
    ...prime brokerage services, financing services and securities lending services to institutional clients, including hedge funds, mutual funds, pension funds and foundations, and to high-net-worth individuals worldwide. ASSET MANAGEMENT AND SECURITIES SERVICES. NOTE 2 Significant Accounting Policies...

  • Page 94
    ...Trading and principal investments" in the consolidated statements of earnings. 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 (the exit price...

  • Page 95
    ... in the underlying investment or comparable entities, subsequent rounds of financing, recapitalizations and other transactions across the capital structure, offerings in the equity or debt capital markets, and changes in financial ratios or cash ï¬,ows. Goldman Sachs 2007 Annual Report 93

  • Page 96
    ...accounted for as sales under SFAS No. 140 when the firm has relinquished control over the transferred assets. For transfers accounted for as sales, any related gains or losses are recognized in net revenues. Transfers that are not TRANSFERS OF FINANCIAL ASSETS. 94 Goldman Sachs 2007 Annual Report

  • Page 97
    ...in "Trading and principal investments" in the consolidated statements of earnings on a trade-date basis. COMMISSIONS. Revenues from variable annuity and life insurance contracts, and from providing reinsurance of such contracts, generally consist of fees assessed on contract holder account balances...

  • Page 98
    ... Financial Statements In certain cases, primarily related to the death of an employee or conï¬,icted employment (as outlined in the applicable award agreements), the firm may cash settle share-based compensation awards. For awards accounted for as equity instruments, "Additional paid-in capital...

  • Page 99
    ...nancial assets, financial liabilities and firm commitments at fair value (i.e., the fair value option), on an instrument-byinstrument basis, that are otherwise not accounted for at fair value under other accounting standards. The election to use the SFAS NO. 159. Goldman Sachs 2007 Annual Report...

  • Page 100
    ... certain unsecured short-term borrowings, consisting of all promissory notes and commercial paper; certain other secured financings, primarily transfers accounted for as financings rather than sales under SFAS No. 140 and debt raised through the firm's William Street program; certain unsecured...

  • Page 101
    ... (3) Net (4) Includes $1.17 billion of securities held within the firm's insurance subsidiaries which are accounted for as available-for-sale under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities" as of November 2007. Includes $9.95 billion of securities held...

  • Page 102
    ... (6) Consists of private equity and real estate fund investments. cash collateral and the impact of netting across the levels of the fair value hierarchy. Netting among positions classified within the same level is included in (7) Represents that level. 100 Goldman Sachs 2007 Annual Report

  • Page 103
    ... government, federal agency and sovereign obligations Bank loans Corporate debt securities and other debt obligations Equities and convertible debentures Physical commodities Cash instruments Derivative contracts Financial instruments sold, but not yet purchased, at fair value Unsecured short-term...

  • Page 104
    ... of earnings. all is reported in "Trading and principal investments" in the consolidated statements of earnings. (2) Substantially (3) Principally resulted from changes in level 2 inputs. As of November 2007, the changes in the fair value of receivables (including securities borrowed and resale...

  • Page 105
    ... executes a high volume of transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment funds and other institutional clients, resulting in significant credit concentration with respect to this industry. In the ordinary course...

  • Page 106
    ... unsecured long-term borrowings, had a carrying value of $463 million and $1.13 billion (excluding the debt host contract) as of November 2007 and November 2006, respectively. See Notes 4 and 5 for further information regarding the firm's unsecured borrowings. 104 Goldman Sachs 2007 Annual Report

  • Page 107
    ... CDOs and CLOs (3) Corporate Debt (4) Fair value of retained interests Weighted average life (years) Constant prepayment rate Impact of 10% adverse change Impact of 20% adverse change Anticipated credit losses (1) Impact of 10% adverse change (2) Impact of 20% adverse change (2) Discount rate...

  • Page 108
    ... performing and nonperforming debt, equity, real estate, power-related and other assets. In addition, the firm utilizes VIEs to provide investors with principal-protected notes, credit-linked notes and asset-repackaged notes designed to meet their objectives. 106 Goldman Sachs 2007 Annual Report

  • Page 109
    ... equities. related to principal-protected notes consist of out-of-the-money written put options that provide principal protection to clients invested in various fund products, with risk to the firm mitigated through portfolio rebalancing. (4) The (5) Derivatives Goldman Sachs 2007 Annual Report...

  • Page 110
    ... entities, collateralized central bank financings, transfers of financial assets that are accounted for as financings rather than sales under SFAS No. 140 (primarily pledged bank loans and mortgage whole loans) and other structured financing arrangements. 108 Goldman Sachs 2007 Annual Report

  • Page 111
    ...after giving effect to hedging activities. The weighted average interest rates as of November 2007 and November 2006 excluded financial instruments accounted for at fair value under SFAS No. 155 or SFAS No. 159. other secured financings maturing within one year of the financial statement date and...

  • Page 112
    ... year of the financial statement date and unsecured long-term borrowings that are redeemable within one year of the financial statement date at the option of the holder. The firm accounts for promissory notes, commercial paper and certain hybrid financial instruments at fair value under SFAS No...

  • Page 113
    ... effectively convert a substantial portion of its unsecured long-term borrowings into U.S. dollar-based ï¬,oating rate obligations. Accordingly, the carrying value of unsecured long-term borrowings approximated fair value as of November 2007 and November 2006. Goldman Sachs 2007 Annual Report 111

  • Page 114
    ...but are not consolidated for accounting purposes. AUTOMATIC PREFERRED ENHANCED CAPITAL SECURITIES. The firm pays interest semiannually on these debentures at an annual rate of 6.345% and the debentures mature on February 15, 2034. The coupon rate and the payment dates applicable to the beneficial...

  • Page 115
    ... the non-investment-grade amount as of November 2006 was $39.68 billion of exposure to leveraged lending capital market transactions, $12.11 billion related to commercial real estate transactions and $5.23 billion arising from other unfunded credit facilities. Goldman Sachs 2007 Annual Report 113

  • Page 116
    ... LP (Litton), the mortgage servicing unit of Credit-Based Asset Servicing and Securitization LLC (C-BASS). The transaction closed in December 2007 at a purchase price of $428 million, plus the repayment of $916 million of outstanding Litton debt obligations. 114 Goldman Sachs 2007 Annual Report

  • Page 117
    ... its capacity as an agency lender, indemnifies most of its securities lending customers against losses incurred in the event that borrowers do not return securities and the collateral held is insufficient to cover the market value of the securities borrowed. In the ordinary course of business, the...

  • Page 118
    ... in respect of such transactions are secured by the assets in the client's account as well as any proceeds received from the transactions cleared and settled by the firm on behalf of the client. In connection with joint venture investments, the firm 116 Goldman Sachs 2007 Annual Report

  • Page 119
    ...rm's current and projected capital positions (i.e., comparisons of the firm's desired level of capital to its actual level of capital) but which may also be inï¬,uenced by general market conditions and the prevailing price and trading volumes of the firm's common stock. As of November 2007, the...

  • Page 120
    ... (38) 2 28 $ 21 of net unrealized gains of $9 million on available-for-sale securities held by investees accounted for under the equity method and net unrealized losses of $1 million on available-for-sale securities held by the firm's insurance subsidiaries. 118 Goldman Sachs 2007 Annual Report

  • Page 121
    ... Financial Advisory Underwriting Trading and Principal Investments FICC Equities (1) Principal Investments Asset Management and Securities Services Asset Management (2) Securities Services Total (1) Primarily $ - 125 123 2,381 11 564 117 $ - 125 136 2,381 4 421 117 $3,321 related to SLK LLC...

  • Page 122
    ...89 (865) $2,502 New York Stock Exchange (NYSE) specialist rights Gross carrying amount Accumulated amortization Net carrying amount Insurance-related assets (2) Gross carrying amount Accumulated amortization Net carrying amount Exchange-traded fund (ETF) specialist rights Gross carrying amount...

  • Page 123
    ... Reserves for guaranteed minimum death and income benefits Total insurance-related liabilities $ 7,039 2,142 937 226 $10,344 $ 7,957 2,123 1,134 257 $11,471 Separate account liabilities are offset by separate account assets, representing segregated contract holder funds under variable annuity...

  • Page 124
    ... unrecognized actuarial gains and losses, prior service costs, and transition obligations and assets within "Accumulated other comprehensive income/(loss)" in the consolidated statements of changes in shareholders' equity. Additional minimum pension liabilities are derecognized upon adoption of the...

  • Page 125
    ...Financial Statements The following table provides a summary of the changes in the plans' benefit obligations and the fair value of assets for November 2007 and November 2006 and a statement of the funded status of the plans as of November 2007... 17 (8) - $ 372 Goldman Sachs 2007 Annual Report 123

  • Page 126
    ...) 11 - $ 65 $ 19 19 18 $ 56 $ - 19 (27) 6 $ (2) $ 44 20 (23) 12 (17) $ 36 $ 23 13 4 $ 40 a benefit as a result of the termination of a Japanese pension plan. 124 Goldman Sachs 2007 Annual Report

  • Page 127
    ..., an annual growth rate in the per capita cost of covered healthcare benefits of 10.02% was assumed for the year ending November 2008. The rate was assumed to decrease ratably to 5.00% for the year ending November 2015 and remain at that level thereafter. Goldman Sachs 2007 Annual Report 125

  • Page 128
    ..., debt securities and other assets, is targeted to maximize the longterm return on assets for a given level of risk. Investment risk is measured and monitored on an ongoing basis by the firm's Retirement Committee through periodic portfolio reviews, meetings with investment managers and annual...

  • Page 129
    ... the grant date. Compensation expense related to these restricted stock units is recognized over the vesting period. The total value of restricted stock units granted in 2007 and 2006 in order to effect the 25% discount was $66 million and $72 million, respectively. Goldman Sachs 2007 Annual Report...

  • Page 130
    ... the underlying shares to employees, the firm generally issues new shares of common stock. The activity related to these restricted stock units is set forth below: Restricted Stock Units Outstanding Future Service Required No Future Service Required Weighted Average Grant-Date Fair Value of...

  • Page 131
    ... 4.07 - 8.00 - 9.55 90.00 - 104.99 105.00 - 119.99 120.00 - 134.99 135.00 - 194.99 195.00 - 209.99 Outstanding, November 2007 (1) Includes stock options granted to employees subsequent to November 2007 as part of compensation for 2007. Goldman Sachs 2007 Annual Report 129

  • Page 132
    ... of business, the firm may also engage in other activities with these funds, including, among others, securities lending, trade execution, trading, custody and acquisition and bridge financing. See Note 6 for the firm's commitments related to these funds. 130 Goldman Sachs 2007 Annual Report

  • Page 133
    ..., primarily due to an increase in deferred tax assets relating to net operating losses considered more likely than not to expire unused. Net operating loss carryforwards were $2.12 billion and $1.78 billion as of November 2007 and November 2006, respectively. Goldman Sachs 2007 Annual Report 131

  • Page 134
    ... 2005, related to the delivery of common stock underlying restricted stock units and the exercise of options, were credited directly to "Additional paid-in capital" in the consolidated statements of financial condition and changes in shareholders' equity. 132 Goldman Sachs 2007 Annual Report

  • Page 135
    ...(GS&Co.) and Goldman Sachs Execution & Clearing, L.P. (GSEC). GS&Co. and GSEC are registered U.S. broker-dealers and futures commission merchants subject to Rule 15c3-1 of the SEC and Rule 1.17 of the Commodity Futures Trading Commission, which specify uniform minimum net capital requirements, as de...

  • Page 136
    ... Financial Statements NOTE 16 Business Segments In reporting to management, the firm's operating results are categorized into the following three business segments: Investment Banking, Trading and Principal Investments, and Asset Management and Securities Services. The firm allocates revenues...

  • Page 137
    ... below: Year Ended November (in millions) 2007 2006 2005 (3) Pre-tax Investment Banking Trading and Principal Investments Asset Management and Securities Services Total depreciation and amortization $ 137 845 185 $1,167 $119 725 151 $995 $143 565 146 $854 Goldman Sachs 2007 Annual Report 135

  • Page 138
    ...Equities: location of the trading desk. Principal Investments: location of the investment. Asset Management: location of the sales team. Securities Services: location of the primary market for the underlying security. â-  â-  â-  â-  The following table sets forth the total net revenues...

  • Page 139
    .... 2007 Quarter (in millions, except per share data) First Second Third Fourth Total revenues Interest expense Revenues, net of interest expense Operating expenses (1) Pre-tax earnings Provision for taxes Net earnings Preferred stock dividends Net earnings applicable to common shareholders Earnings...

  • Page 140
    ... reported sales price for the firm's common stock on the New York Stock Exchange was $187.21 per share. Common Stock Price Performance The following graph compares the performance of an investment in the firm's common stock from November 29, 2002 through November 30, 2007, with the S&P 500 Index...

  • Page 141
    ...Book value per common share (1) Average common shares outstanding Basic Diluted Selected data (unaudited) Employees United States Non-U.S. Total employees Assets under management (in billions) (2) Asset class Alternative investments (3) Equity Fixed income Total non-money market assets Money markets...

  • Page 142
    ... J. William McMahon Audrey A. McNiff Wayne L. Moore Donald J. Mulvihill Stephen R. Pierce John J. Rafter Charlotte P. Ransom John F.W. Rogers J. Michael Sanders Victor R. Simone, Jr. John F.W. Rogers Secretary to the Board *Partnership Committee Member 140 Goldman Sachs 2007 Annual Report

  • Page 143
    ...Yoel Zaoui* Joan H. Zief Kendrick R. Wilson III Peter C. Aberg Frances R. Bermanzohn Robert A. Berry Craig W. Broderick Richard M. Campbell-Breeden Anthony H. Carpet Michael J. Carr Kent A. Clark Timothy J. Cole Edith W. Cooper* John S. Daly... Committee Member Goldman Sachs 2007 Annual Report 141

  • Page 144
    Board...James H. Rogan Gary J. Sveva Christopher...Josselyn Toshinobu Kasai Eric S. Lane ...John E. Smollen Raymond B. Strong, III Nicolas F. Tiffou David H. Voon John...Joseph F. Squeri Christoph W. Stanger Chase O. Stevenson Richard J. Stingi *Partnership Committee Member 142 Goldman Sachs 2007 Annual Report

  • Page 145
    ... Lee Joseph B. Lee Eugene H. Leouzon Wayne M. Leslie Kemp J. Lewis John S. Lindfors Iain Lindsay Michael C. Liou Hugo P. MacNeill Arline Mann Andrew A. McEachern Christopher D. McFadden Kevin T. McGuire Thomas J. McLaughlin Avinash Mehrotra Jonathan M. Meltzer Goldman Sachs 2007 Annual Report 143

  • Page 146
    ...X. Gonzalez Jason A. Gottlieb Maria M. Grant Christoph Gugelmann John D. Haase Mark K. Hancock Martin Hintze ... LoBue Joseph W. Macaione Ian W. MacLeod David M. Marcinek Marvin Markus Roger C. Matthews, Jr. Thomas F. Matthias F. Scott McDermott John J. ... III 144 Goldman Sachs 2007 Annual Report

  • Page 147
    ...John D. Storey Jonathan W. Summers Ram K. Sundaram Tatsuya Suzuki Michael J. Swenson Joseph D. Swift Henry Seiichi Takata Jasper Tans Eric... Gerard M. Beatty Henry Becker, Jr. Roger S. Begelman Oliver B. Benkert Avanish R. Bhavsar Joshua S. ...Howe Stephanie Hui Goldman Sachs 2007 Annual Report 145

  • Page 148
    ... Philippa A. Rogers Michael E....Oliver Thym Ingrid C. Tierens Nadia Titarchuk Joseph...Kelly Andrew Wilkinson Eric M. Kirsch ...John G. Bruno Patrick Tassin de Nonneville Gabriel Perahia Diego E. Ferro David M. Inggs Kenneth J. Newcombe James M. Karp Shirish B. Godbole 146 Goldman Sachs 2007 Annual Report

  • Page 149
    ...Chang Christian Channell Westley D. Chapman Eva Chau Yves Checoury David Chou Thalia Chryssikou Charles J. Citro Michael J. Civitella Luke E. Clayton Ira H. Cohen Remi Colinmaire Kathleen A. Connolly John... Yanis Papagiannis Dave S. Park Anthony W. Pasquariello Goldman Sachs 2007 Annual Report 147

  • Page 150
    Board... Andrei M. Saunders Richard A. Schafrann Oliver Schiller Martin A. Schneider Gabriel T. ... Shen Jonathan M. Sheridan James Roger Francis Shipton Faryar Shirzad Connie ...Jack B. Navarro Vinit Sahni Rafael I. de Fex John M. Draghi Mary Pang Joseph M. Demarest 148 Goldman Sachs 2007 Annual Report

  • Page 151
    ...to Goldman Sachs JBWere Offices Atlanta Auckland* Bangalore Bangkok Beijing Boston Buenos Aires Calgary Chicago Dallas Doha Dubai Dublin Frankfurt Geneva George Town Hong Kong Houston Jersey City Johannesburg London Los Angeles Madrid Melbourne* Mexico City Miami Milan Moscow Mumbai New York Paris...

  • Page 152
    ...from registered shareholders of The Goldman Sachs Group, Inc. regarding lost or stolen stock certificates, dividends, changes of address and other issues related to registered share ownership should be addressed to: Mellon Investor Services LLC 480 Washington Boulevard Jersey City, New Jersey 07310...

  • Page 153
    ... if it came to a choice, rather be best than biggest. 11 We constantly strive to anticipate the rapidly changing needs of our clients and to develop new services to meet those needs. We know that the world of finance will not stand still and that complacency can lead to extinction. 5 12 We stress...

  • Page 154
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