Goldman Sachs 2002 Annual Report Download - page 36

Download and view the complete annual report

Please find page 36 of the 2002 Goldman Sachs annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 105

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105

mergers and acquisitions.(1) Net revenues in our
Underwriting business declined 36% to $1.77 billion,
primarily reflecting a 53% decline in industry-wide
equity underwriting volumes.(1) Debt underwriting net
revenues were essentially unchanged from 2000. The
reduction in Investment Banking net revenues was pri-
marily due to lower levels of activity in the communica-
tions, media and entertainment, telecommunications,
high technology and industrial sectors. Our investment
banking backlog at the end of 2001 was significantly
lower than at the end of 2000.(2)
Operating expenses decreased 14% , primarily due to
decreased compensation and benefits expenses as lower
discretionary compensation more than offset the impact
of the growth in employment levels in 2000. Pre-tax earn-
ings were $719 million in 2001 compared with $1.73 bil-
lion in 2000.
Trading and Principal Investments
Our Trading and Principal Investments business facili-
tates customer transactions with a diverse group of
corporations, financial institutions, governments and
individuals and takes proprietary positions through
market making in, and trading of, fixed income and
equity products, currencies, commodities, and swaps
and other derivatives. In addition, we engage in floor-
based and electronic market making as a specialist on
U.S. equities and options exchanges. The activities of
our Trading and Principal Investments segment are
divided into three categories:
•f icc – We make markets in and trade interest rate
and credit products, currencies and commodities,
structure and enter into a wide variety of derivative
transactions, and engage in proprietary trading;
•eq uit ies – We make markets in, act as a specialist
for, and trade equities and equity-related products,
structure and enter into equity derivative transac-
tions, and engage in proprietary trading; and
•pr incipal invest ment s – Principal Investments
primarily represents net revenues from our mer-
chant banking investments.
Substantially all of our inventory is marked-to-market
daily and, therefore, its value and our net revenues are
subject to fluctuations based on market movements. In
addition, net revenues derived from our principal invest-
ments in privately held concerns and in real estate may
fluctuate significantly depending on the revaluation or
sale of these investments in any given period. We also reg-
ularly enter into large transactions as part of our trading
businesses. The number and size of such transactions may
affect our results of operations in a given period.
In January 2002, we began to implement a new fee-based
pricing structure in our Nasdaq trading business.
Previously we did not charge explicit fees in this business
but rather earned market-making revenues based gener-
ally on the difference between bid and ask prices. Such
market-making net revenues are reported in our Equities
trading results. As a result of the change to the fee-based
pricing structure, a substantial portion of our Nasdaq net
revenues is reported in Commissions below and in “Asset
management and securities services” in the consolidated
statements of earnings.
Net revenues from Principal Investments do not include
management fees and the increased share of the income
and gains from our merchant banking funds (merchant
banking overrides) to which we are entitled when the
return on investments exceeds certain threshold returns to
fund investors. These management fees and increased
shares of income and gains are included in the net revenues
of the Asset Management and Securities Services segment.
Managem ent’s D iscussion and A nalysis
34 G O L D M A N SA CH S 2002 AN N UA L R EPO RT
The following table sets forth the operating results of our Trading and Principal Investments segment:
TRADING AND PRNCIPAL INVESTMENTS OPERATING RESULTS
YEAR ENDED NOVEMBER
(IN MILLIONS) 2002 2001 2000
FICC $4,470 $4,047 $3,004
Equities 1,008 2,923 3,489
Principal Investments (229) (621) 134
Total net revenues 5,249 6,349 6,627
Operating expenses 4,273 5,134 4,199
Pre-tax earnings $ 976 $1,215 $2,428
(1) Source: Thomson Financial Securities Data – November 25, 2000 through November 30, 2001 and November 27, 1999 through November 24, 2000.
(2) Our investment banking backlog represents an estimate of our future net revenues from investment banking transactions where we believe that
future revenue realization is more probable than not.