Goldman Sachs 2007 Annual Report Download - page 41

Management’s Discussion and Analysis
mortgage market throughout the year, while net revenues in
credit products were strong, but slightly lower compared with
2006. Credit products included substantial gains from equity
investments, including a gain of approximately $900 million
related to the disposition of Horizon Wind Energy L.L.C., as
well as a loss of approximately $1 billion, net of hedges, related
to non-investment-grade credit origination activities. During
2007, FICC operated in an environment generally characterized
by strong customer-driven activity and favorable market
opportunities. However, during the year, the mortgage market
experienced significant deterioration and, in the second half of
the year, the broader credit markets were characterized by
wider spreads and reduced levels of liquidity. We continued to
capitalize on trading and investing opportunities for our clients
and ourselves and, accordingly, our market risk increased,
particularly in interest rate and equity products. In addition,
our total assets surpassed $1 trillion during the year, as we
grew our balance sheet in order to support these opportunities,
as well as to support increased activity in Securities Services.
The increase in Principal Investments reflected strong results in
both corporate and real estate investing.
The increase in Investment Banking reflected a 64% increase
in Financial Advisory net revenues and a strong performance in
our Underwriting business. The increase in Financial Advisory
primarily reflected growth in industry-wide completed mergers
and acquisitions. The increase in Underwriting reflected higher
net revenues in debt underwriting, as leveraged finance activity
was strong during the first half of our 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 in Securities Services primarily
reflected significant growth in global customer balances. The
increase in Asset Management reflected significantly higher
asset management fees, partially offset by significantly lower
incentive fees. During the year, assets under management
increased $192 billion, or 28%, to a record $868 billion,
including net inflows of $161 billion.
In 2008, we will remain focused on our clients, geographic
expansion and the importance of effective risk management.
We continue to see opportunities for growth in the businesses
and geographic areas in which we operate and, in particular, we
believe continued expansion of the economies of Brazil, Russia,
India and China, as well as those of the Middle East, will offer
opportunities for us to increase our presence in those markets.
Though we generated particularly strong results in 2007, our
business, by its nature, does not produce predictable earnings.
Our results in any given period can be materially affected by
conditions in global financial markets and economic conditions
generally. For a further discussion of the factors that may affect
our future operating results, see “ — Certain Risk Factors That
May Affect Our Business” below as well as “Risk Factors” in
Part I, Item 1A of the Annual Report on Form 10-K.
Business Environment
As an investment banking, securities and investment management
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. A favorable
business environment is generally characterized by, among
other factors, high global gross domestic product growth,
stable geopolitical conditions, transparent, liquid and efficient
capital markets, low inflation, high business and investor
confidence and strong business earnings. These factors provide
a positive climate for our investment banking activities, for
many of our trading and investing businesses and for wealth
creation, which contributes to growth in our asset management
business. During the first half of 2007, global economic growth
was generally solid, inflation remained contained, global equity
markets rose and corporate activity levels were strong.
However, during the second half of 2007, significant weakness
and volatility in global credit markets, particularly in the U.S.
and Europe, spread to broader financial markets and began to
affect global economic growth. For a further discussion of how
market conditions can affect our businesses, see “ — Certain
Risk Factors That May Affect Our Business” below as well as
“Risk Factors” in Part I, Item 1A of the Annual Report on
Form 10-K. A further discussion of the business environment
in 2007 is set forth below.
(1)
Our investment banking transaction backlog represents an estimate of our future
net revenues from investment banking transactions where we believe that future
revenue realization is more likely than not.
39Goldman Sachs 2007 Annual Report