Goldman Sachs 2007 Annual Report Download - page 40

Management’s Discussion and Analysis
Introduction
Goldman Sachs is a leading global investment banking, securities
and investment management firm that provides a wide range
of services worldwide to a substantial and diversified client base
that includes corporations, financial institutions, governments
and high-net-worth individuals.
Our activities are divided into three segments:
■ INVESTMENT BANKING. We provide a broad range of
investment banking services to a diverse group of corporations,
financial institutions, investment funds, governments and
individuals.
■
TRADING AND PRINCIPAL INVESTMENTS. We facilitate client
transactions with a diverse group of corporations, financial
institutions, investment funds, governments and individuals
and take proprietary positions through market making in,
trading of and investing in fixed income and equity products,
currencies, commodities and derivatives on these products. In
addition, we engage in market-making and specialist activities
on equities and options exchanges and clear client transactions
on major stock, options and futures exchanges worldwide. In
connection with our merchant banking and other investing
activities, we make principal investments directly and through
funds that we raise and manage.
■
ASSET MANAGEMENT AND SECURITIES SERVICES. We provide
investment advisory and financial planning services and offer
investment products (primarily through separately managed
accounts and commingled vehicles, such as mutual funds and
private investment funds) across all 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 worldwide.
Unless specifically stated otherwise, all references to 2007,
2006 and 2005 refer to our fiscal years ended, or the dates, as
the context requires, November 30, 2007, November 24, 2006
and November 25, 2005, respectively.
When we use the terms “Goldman Sachs,” “we,” “us” and
“our,” we mean The Goldman Sachs Group, Inc. (Group Inc.),
a Delaware corporation, and its consolidated subsidiaries.
References herein to the Annual Report on Form 10-K are to
our Annual Report on Form 10-K for the fiscal year ended
November 30, 2007.
In this discussion, we have included statements that may
constitute “forward-looking statements” within the meaning
of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements are not
historical facts but instead represent only our beliefs regarding
future events, many of which, by their nature, are inherently
uncertain and outside our control. These statements include
statements other than historical information or statements of
current condition and may relate to our future plans and
objectives and results, among other things, and may also include
statements about the objectives and effectiveness of our risk
management and liquidity policies, statements about trends in
or growth opportunities for our businesses and statements
about our investment banking transaction backlog. By identifying
these statements for you in this manner, we are alerting you to
the possibility that our actual results and financial condition
may differ, possibly materially, from the anticipated results and
financial condition indicated in these forward-looking statements.
Important factors that could cause our actual results and financial
condition to differ from those indicated in these forward-looking
statements include, among others, those discussed below under
“ — Certain Risk Factors That May Affect Our Business” as
well as “Risk Factors” in Part I, Item 1A of the Annual Report
on Form 10-K and “Cautionary Statement Pursuant to the
Private Securities Litigation Reform Act of 1995” in Part I,
Item 1 of the Annual Report on Form 10-K.
Executive Overview
Our diluted earnings per common share were $24.73 for 2007
compared with $19.69 for 2006. During 2007, we achieved
record results in the Americas, Europe and Asia, and derived
over one-half of our pre-tax earnings outside of the Americas.
Return on average tangible common shareholders’ equity
(1)
was
38.2% and return on average common shareholders’ equity was
32.7% for 2007. Book value per common share increased 25%
to $90.43 at year end. During 2007, we repurchased 41.2 million
shares of our common stock for a total cost of $8.96 billion.
In 2007, we generated record diluted earnings per common
share, which exceeded the prior year record results by 26%.
Each of our three segments produced record net revenues. The
increase in Trading and Principal Investments reflected higher
net revenues in Equities, Fixed Income, Currency and
Commodities (FICC) and Principal Investments. Net revenues
in Equities increased 33% compared with 2006, reflecting
significantly higher net revenues in both our customer franchise
businesses and principal strategies. During 2007, Equities
operated in an environment characterized by strong customer-
driven activity, generally higher equity prices and higher levels
of volatility, particularly during the second half of the year. The
increase in FICC reflected significantly higher net revenues in
currencies and interest rate products. In addition, net revenues
in mortgages were higher despite a significant deterioration in the
(1)
Return on average tangible common shareholders’ equity (ROTE) is computed by
dividing net earnings applicable to common shareholders by average monthly
tangible common shareholders’ equity. See “ — Results of Operations — Financial
Overview” below for further information regarding our calculation of ROTE.
38 Goldman Sachs 2007 Annual Report