Goldman Sachs 2012 Annual Report Download - page 56

Management’s Discussion and Analysis
The table below presents the operating results of our
Institutional Client Services segment.
Year Ended December
in millions 2012 2011 2010
Fixed Income, Currency and
Commodities Client Execution $ 9,914 $ 9,018 $13,707
Equities client execution 13,171 3,031 3,231
Commissions and fees 3,053 3,633 3,426
Securities services 1,986 1,598 1,432
Total Equities 8,210 8,262 8,089
Total net revenues 18,124 17,280 21,796
Operating expenses 12,480 12,837 14,994
Pre-tax earnings $ 5,644 $ 4,443 $ 6,802
1. Includes net revenues related to reinsurance of $1.08 billion, $880 million
and $827 million for the years ended December 2012, December 2011 and
December 2010, respectively.
2012 versus 2011. Net revenues in Institutional Client
Services were $18.12 billion for 2012, 5% higher
than 2011.
Net revenues in Fixed Income, Currency and Commodities
Client Execution were $9.91 billion for 2012, 10% higher
than 2011. These results reflected strong net revenues in
mortgages, which were significantly higher compared with
2011. In addition, net revenues in credit products and
interest rate products were solid and higher compared with
2011. These increases were partially offset by significantly
lower net revenues in commodities and slightly lower net
revenues in currencies. Although broad market concerns
persisted during 2012, Fixed Income, Currency and
Commodities Client Execution operated in a generally
improved environment characterized by tighter credit
spreads and less challenging market-making conditions
compared with 2011.
Net revenues in Equities were $8.21 billion for 2012,
essentially unchanged compared with 2011. Net revenues
in securities services were significantly higher compared
with 2011, reflecting a gain of approximately $500 million
on the sale of our hedge fund administration business. In
addition, equities client execution net revenues were higher
than 2011, primarily reflecting significantly higher results
in cash products, principally due to increased levels of client
activity. These increases were offset by lower commissions
and fees, reflecting lower market volumes. During 2012,
Equities operated in an environment generally
characterized by an increase in global equity prices and
lower volatility levels.
The net loss attributable to the impact of changes in our own
credit spreads on borrowings for which the fair value option
was elected was $714 million ($433 million and $281 million
related to Fixed Income, Currency and Commodities Client
Execution and equities client execution, respectively) for
2012, compared with a net gain of $596 million
($399 million and $197 million related to Fixed Income,
Currency and Commodities Client Execution and equities
client execution, respectively) for 2011.
During 2012, Institutional Client Services operated in an
environment generally characterized by continued broad
market concerns and uncertainties, although positive
developments helped to improve market conditions. These
developments included certain central bank actions to ease
monetary policy and address funding risks for European
financial institutions. In addition, the U.S. economy posted
stable to improving economic data, including favorable
developments in unemployment and housing. These
improvements resulted in tighter credit spreads, higher
global equity prices and lower levels of volatility. However,
concerns about the outlook for the global economy and
continued political uncertainty, particularly the political
debate in the United States surrounding the fiscal cliff,
generally resulted in client risk aversion and lower activity
levels. Also, uncertainty over financial regulatory reform
persisted. If these concerns and uncertainties continue over
the long term, net revenues in Fixed Income, Currency and
Commodities Client Execution and Equities would likely be
negatively impacted.
Operating expenses were $12.48 billion for 2012, 3%
lower than 2011, primarily due to lower brokerage,
clearing, exchange and distribution fees, and lower
impairment charges, partially offset by higher net
provisions for litigation and regulatory proceedings.
Pre-tax earnings were $5.64 billion in 2012, 27% higher
than 2011.
2011 versus 2010. Net revenues in Institutional Client
Services were $17.28 billion for 2011, 21% lower
than 2010.
Net revenues in Fixed Income, Currency and Commodities
Client Execution were $9.02 billion for 2011, 34% lower
than 2010. Although activity levels during 2011 were
generally consistent with 2010 levels, and results were solid
during the first quarter of 2011, the environment during the
remainder of 2011 was characterized by broad market
concerns and uncertainty, resulting in volatile markets and
significantly wider credit spreads, which contributed to
difficult market-making conditions and led to reductions in
risk by us and our clients. As a result of these conditions,
net revenues across the franchise were lower, including
significant declines in mortgages and credit products,
compared with 2010.
54 Goldman Sachs 2012 Annual Report