Goldman Sachs 2012 Annual Report Download - page 55

Management’s Discussion and Analysis
Operating expenses were $3.33 billion for 2012, 11%
higher than 2011, due to increased compensation and
benefits expenses, primarily resulting from higher net
revenues. Pre-tax earnings were $1.60 billion in 2012, 17%
higher than 2011.
2011 versus 2010. Net revenues in Investment Banking
were $4.36 billion for 2011, 9% lower than 2010.
Net revenues in Financial Advisory were $1.99 billion, 4%
lower than 2010. Net revenues in our Underwriting
business were $2.37 billion, 14% lower than 2010,
reflecting significantly lower net revenues in equity
underwriting, principally due to a decline in industry-wide
activity. Net revenues in debt underwriting were essentially
unchanged compared with 2010.
Investment Banking operated in an environment generally
characterized by significant declines in industry-wide
underwriting and mergers and acquisitions activity levels
during the second half of 2011. These declines reflected
increased concerns regarding the weakened state of global
economies, including heightened European sovereign debt
risk, which contributed to a significant widening in credit
spreads, a sharp increase in volatility levels and a significant
decline in global equity markets during the second half
of 2011.
Our investment banking transaction backlog increased
compared with the end of 2010. The increase compared
with the end of 2010 was due to an increase in potential
equity underwriting transactions, primarily reflecting an
increase in client mandates to underwrite initial public
offerings. Estimated net revenues from potential debt
underwriting transactions decreased slightly compared with
the end of 2010. Estimated net revenues from potential
advisory transactions were essentially unchanged compared
with the end of 2010.
Operating expenses were $3.00 billion for 2011, 13%
lower than 2010, due to decreased compensation and
benefits expenses, primarily resulting from lower net
revenues. Pre-tax earnings were $1.36 billion in 2011,
essentially unchanged compared with 2010.
Institutional Client Services
Our Institutional Client Services segment is comprised of:
Fixed Income, Currency and Commodities Client
Execution. Includes client execution activities related to
making markets in interest rate products, credit products,
mortgages, currencies and commodities.
We generate market-making revenues in these activities, in
three ways:
‰In large, highly liquid markets (such as markets for U.S.
Treasury bills or certain mortgage pass-through
certificates), we execute a high volume of transactions for
our clients for modest spreads and fees.
‰In less liquid markets (such as mid-cap corporate bonds,
growth market currencies or certain non-agency
mortgage-backed securities), we execute transactions for
our clients for spreads and fees that are generally
somewhat larger.
‰We also structure and execute transactions involving
customized or tailor-made products that address our
clients’ risk exposures, investment objectives or other
complex needs (such as a jet fuel hedge for an airline).
Given the focus on the mortgage market, our mortgage
activities are further described below.
Our activities in mortgages include commercial
mortgage-related securities, loans and derivatives,
residential mortgage-related securities, loans and
derivatives (including U.S. government agency-issued
collateralized mortgage obligations, other prime, subprime
and Alt-A securities and loans), and other asset-backed
securities, loans and derivatives.
We buy, hold and sell long and short mortgage positions,
primarily for market making for our clients. Our inventory
therefore changes based on client demands and is generally
held for short-term periods.
See Notes 18 and 27 to the consolidated financial statements
for information about exposure to mortgage repurchase
requests, mortgage rescissions and mortgage-related
litigation.
Equities. Includes client execution activities related to
making markets in equity products, as well as commissions
and fees from executing and clearing institutional client
transactions on major stock, options and futures exchanges
worldwide. Equities also includes our securities services
business, which provides financing, securities lending and
other prime brokerage services to institutional clients,
including hedge funds, mutual funds, pension funds and
foundations, and generates revenues primarily in the form
of interest rate spreads or fees, and revenues related to our
reinsurance activities.
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