Goldman Sachs 2007 Annual Report Download - page 43

Management’s Discussion and Analysis
confidence in capital markets; natural disasters or pandemics;
or a combination of these or other factors, have adversely
affected, and may in the future adversely affect, our business
and profitability in many ways, including the following:
■ Increasing or high interest rates and/or widening credit
spreads, especially if such changes are rapid, may create a less
favorable environment for certain of our businesses, and may
affect the fair value of financial instruments that we issue or
hold. For example, beginning in the second half of 2007,
difficulties in the mortgage and broader credit markets
resulted in a relatively sudden and substantial decrease in the
availability of credit and credit spreads widened significantly,
affecting volatility and liquidity in the debt and equity markets.
■
We have been committing increasing amounts of capital in
many of our businesses and generally maintain large trading,
specialist and investing positions. Market fluctuations and
volatility may adversely affect the value of those positions or
may reduce our willingness to enter into new transactions.
Conversely, certain of our trading businesses depend on market
volatility to provide trading and arbitrage opportunities, and
decreases in volatility may reduce these opportunities and
adversely affect the results of these businesses.
■ Increases in interest rates or credit spreads, as well as
limitations on the availability of credit, can affect our ability
to borrow on a secured or unsecured basis, which may
adversely affect our liquidity and results of operations. We
seek to finance our less liquid assets on a secured basis
and disruptions in the credit markets are likely to make it
harder and more expensive to fund these assets. In difficult
credit markets, we may be forced to fund our operations at a
higher cost or we may be unable to raise as much funding as
we need to support our business activities. This could cause
us to curtail our business activities and could increase our cost
of funding, both of which could reduce our profitability.
■
Industry-wide declines in the size and number of underwritings
and mergers and acquisitions may have an adverse effect on
our revenues and, because we may be unable to reduce
expenses correspondingly, our profit margins. Our clients
engaging in mergers and acquisitions often rely on access to
the secured and unsecured credit markets to finance their
transactions. The lack of available credit or increased cost of
credit may adversely affect the size, volume and timing of our
clients’ merger and acquisition transactions — particularly
large transactions — and adversely affect our financial advisory
and underwriting businesses.
product growth in India slowed to an estimated 8.7% in
calendar year 2007 from 9.4% in 2006, as its currency
strengthened and the central bank tightened monetary policy.
The rate of wholesale inflation fell, but the rate of consumer
price inflation remained elevated. Other currencies in the region
also generally appreciated against the U.S. dollar. Equity markets
rose sharply across the region, with the Shanghai Composite
Index up 138%, and markets in Hong Kong, India and South
Korea ending the year significantly higher.
OTHER MARKETS. Real gross domestic product in Brazil rose by
an estimated 5.4% in calendar year 2007, supported by strong
capital inflows, strong demand and rising prices in commodities,
and expansionary fiscal and monetary policies. The central
bank reduced interest rates even as the rate of inflation rose. In
Russia, real gross domestic product rose by an estimated 7.3% in
calendar year 2007, supported by strong household consumption
and increased capital investment, particularly in the first half
of the year. The rate of inflation rose sharply in the latter part
of the year. Brazilian and Russian equity prices ended our fiscal
year significantly higher.
Certain Risk Factors
That May Affect Our Business
We face a variety of risks that are substantial and inherent in
our businesses, including market, liquidity, credit, operational,
legal and regulatory risks. For a discussion of how management
seeks to manage some of these risks, see “ — Risk Management”
below. A summary of the more important factors that could
affect our business follows below. For a further discussion of
these and other important factors that could affect our business,
see “Risk Factors” in Part I, Item 1A of the Annual Report on
Form 10-K.
MARKET CONDITIONS AND MARKET RISK. Our businesses are
materially affected by conditions in the global financial markets
and economic conditions generally, and these conditions
may change suddenly and dramatically. 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. Unfavorable or uncertain economic and
market conditions, which can be caused by: outbreaks of
hostilities or other geopolitical instability; declines in economic
growth, business activity or investor or business confidence;
limitations on the availability or increases in the cost of credit
and capital; increases in inflation, interest rates, exchange rate
volatility, default rates or the price of basic commodities;
corporate, political or other scandals that reduce investor
41Goldman Sachs 2007 Annual Report