Goldman Sachs 2012 Annual Report Download - page 57

Management’s Discussion and Analysis
Net revenues in Equities were $8.26 billion for 2011, 2%
higher than 2010. During 2011, average volatility levels
increased and equity prices in Europe and Asia declined
significantly, particularly during the third quarter. The
increase in net revenues reflected higher commissions and
fees, primarily due to higher market volumes, particularly
during the third quarter of 2011. In addition, net revenues
in securities services increased compared with 2010,
reflecting the impact of higher average customer balances.
Equities client execution net revenues were lower than
2010, primarily reflecting significantly lower net revenues
in shares.
The net gain attributable to the impact of changes in our
own credit spreads on borrowings for which the fair value
option was elected was $596 million ($399 million and
$197 million related to Fixed Income, Currency and
Commodities Client Execution and equities client
execution, respectively) for 2011, compared with a net gain
of $198 million ($188 million and $10 million related to
Fixed Income, Currency and Commodities Client
Execution and equities client execution, respectively)
for 2010.
Institutional Client Services operated in an environment
generally characterized by increased concerns regarding the
weakened state of global economies, including heightened
European sovereign debt risk, and its impact on the
European banking system and global financial institutions.
These conditions also impacted expectations for economic
prospects in the United States and were reflected in equity
and debt markets more broadly. In addition, the
downgrade in credit ratings of the U.S. government and
federal agencies and many financial institutions during the
second half of 2011 contributed to further uncertainty in
the markets. These concerns, as well as other broad market
concerns, such as uncertainty over financial regulatory
reform, continued to have a negative impact on our net
revenues during 2011.
Operating expenses were $12.84 billion for 2011, 14%
lower than 2010, due to decreased compensation and
benefits expenses, primarily resulting from lower net
revenues, lower net provisions for litigation and regulatory
proceedings (2010 included $550 million related to a
settlement with the SEC), the impact of the U.K. bank
payroll tax during 2010, as well as an impairment of our
NYSE DMM rights of $305 million during 2010. These
decreases were partially offset by higher brokerage,
clearing, exchange and distribution fees, principally
reflecting higher transaction volumes in Equities. Pre-tax
earnings were $4.44 billion in 2011, 35% lower than 2010.
Investing & Lending
Investing & Lending includes our investing activities and
the origination of loans to provide financing to clients.
These investments and loans are typically longer-term in
nature. We make investments, directly and indirectly
through funds that we manage, in debt securities and loans,
public and private equity securities, real estate,
consolidated investment entities and power
generation facilities.
The table below presents the operating results of our
Investing & Lending segment.
Year Ended December
in millions 2012 2011 2010
ICBC $ 408 $ (517) $ 747
Equity securities (excluding ICBC) 2,392 1,120 2,692
Debt securities and loans 1,850 96 2,597
Other 1,241 1,443 1,505
Total net revenues 5,891 2,142 7,541
Operating expenses 2,666 2,673 3,361
Pre-tax earnings/(loss) $3,225 $ (531) $4,180
2012 versus 2011. Net revenues in Investing & Lending
were $5.89 billion and $2.14 billion for 2012 and 2011,
respectively. During 2012, Investing & Lending net
revenues were positively impacted by tighter credit spreads
and an increase in global equity prices. Results for 2012
included a gain of $408 million from our investment in the
ordinary shares of ICBC, net gains of $2.39 billion from
other investments in equities, primarily in private equities,
net gains and net interest income of $1.85 billion from debt
securities and loans, and other net revenues of $1.24 billion,
principally related to our consolidated investment entities.
If equity markets decline or credit spreads widen, net
revenues in Investing & Lending would likely be
negatively impacted.
Operating expenses were $2.67 billion for 2012, essentially
unchanged compared with 2011. Pre-tax earnings were
$3.23 billion in 2012, compared with a pre-tax loss of
$531 million in 2011.
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