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Clients. Markets. Culture.
Goldman Sachs 2006 Annual Report

Table of contents

  • Page 1
    Clients. Markets. Culture. Goldman Sachs 2006 Annual Report

  • Page 2
    ...-term) Unsecured long-term borrowings Total shareholders' equity Leverage ratio (4) Adjusted leverage ratio (5) Debt to equity ratio (6) Return on average common shareholders' equity (7) Return on average tangible common shareholders' equity (8) Selected Data Total employees Assets under management...

  • Page 3
    ...through teamwork, excellence and a passion to deliver for our clients - has instilled in our people an infectious desire to ask, "Is there a better way?" These intangibles define Goldman Sachs and the value we work to provide for our clients and shareholders. Goldman Sachs 2006 Annual Report page...

  • Page 4
    Gary D. Cohn, President and Co-Chief Operating Officer Lloyd C. Blankfein, Chairman and Chief Executive Officer Jon Winkelried, President and Co-Chief Operating Officer page 2 Goldman Sachs 2006 Annual Report

  • Page 5
    ... paid for compensation and related expenses. While our business does not lend itself to predictable earnings on a quarterly basis, over the long term, we are committed to providing our shareholders with returns on equity at or near the top of our industry while continuing to grow book value and...

  • Page 6
    ... role private pools of capital would play across markets. With $145 billion of alternative assets under management, Goldman Sachs is one of the largest managers of direct hedge fund and hedge fund of fund assets as well as private equity portfolios of funds. Our securities services business, which...

  • Page 7
    ...hold leading positions in M&A advisory and underwriting, maintain significant market share in the equity, fixed income, currency and commodity markets, and have one of the largest, best-performing investment management platforms in the world. Clients have never been more important to Goldman Sachs...

  • Page 8
    ... this past year. This innovative structure will provide a steady stream of immunization funds for programs in 70 developing countries by issuing debt in capital markets backed by multiyear grants from sovereign donor governments. These funds are projected page 6 Goldman Sachs 2006 Annual Report

  • Page 9
    .... Innovative trading in these new markets can be a source of meaningful action to address global climate change. Lastly, given the integration of markets and economies, improvements in transportation and communication networks and the development of capital markets around the world, Goldman Sachs is...

  • Page 10
    ...-divisional client teams in Tokyo draw upon professionals from Investment Banking; Investment Management; Equities; Fixed Income, Currency and Commodities; Human Capital Management and Operations to service financial institutions. Pictured at Roppongi Hills, Tokyo Yoshihiko Tanio, Fixed Income...

  • Page 11
    ...of our daily activities, our business strategy and our culture. How our people engage with clients has changed as the markets evolve and clients see their needs changing. Clients continue to select Goldman Sachs for advice, execution and capital for significant strategic opportunities. Increasingly...

  • Page 12
    Hiroko Shinoda, Investment Management; Aki Asami, Investment Banking; Hiroyuki Tomokiyo, Fixed Income, Currency and Commodities; Toshiyuki Ohashi, Investment Banking Takeshi Fukuhara, Operations; Kumiko Ishige, Human Capital Management.

  • Page 13
    ... public cash and share offer. The largest ever in the steel industry, the offer was launched simultaneously in five jurisdictions including the U.S. Goldman Sachs jointly led the loan financing for the acquisition, provided credit rating advisory services and assisted Mittal Steel's communications...

  • Page 14
    ...the international and Hong Kong offerings were significantly oversubscribed, with participation from a broad based pool of institutional, high-net-worth and retail investors. This transaction was a testament to Goldman Sachs' ongoing global leadership in equity offerings. Goldman Sachs 2006 Annual...

  • Page 15
    ...'s largest department store and mail order group, KarstadtQuelle, joined with an affiliate of Goldman Sachs' Whitehall Fund in a real estate joint venture transaction that allowed KarstadtQuelle to regain its financial ï¬,exibility and to focus again on its core business. One of the largest real...

  • Page 16
    ... asset management, expertise in portfolio construction and wealth management resources. With strong distribution through leading banks, broker-dealers and registered investment advisors, our U.S. mutual fund business ranked among the industry's top ten fund complexes in 2006 based on long-term fund...

  • Page 17
    Urban Investment Group Our Urban Investment Group invests as a long-term capital partner in a wide range of minority-led ventures and urban real estate projects. Pictured at The Kalahari, a mixed-use development project in New York City Michael D. Trovini, Lindsay Greene, Martin E. Chavez, Stuart ...

  • Page 18
    ... participants. Goldman Sachs has specific views on how the needs of our clients are helping to shape the evolution of the markets. We have structured our business to reï¬,ect those views, and have taken direct action to help governments, corporations and investors tap the markets to address some of...

  • Page 19
    Richard A. Friedman, Kevin M. Jordan, Margaret Chinwe Anadu, Thomas A. Kalvik, Precious Williams Osei A. Van Horne, Carrie L. Van Syckel, William G. Gonzalez.

  • Page 20
    ... to include trading and investing in project-based emission reduction credits and pricing emission risk. Finally, our newly created Center for Environmental Markets has made leadership grants to support a series of market-based research initiatives. page 16 Goldman Sachs 2006 Annual Report

  • Page 21
    ... such as governance, corporate and investment banking, nonperforming loans disposal and risk, treasury and asset management. In connection with this agreement, Goldman Sachs made a significant investment in ICBC, reinforcing our long-term commitment to China. Goldman Sachs 2006 Annual Report page...

  • Page 22
    ..." capabilities of capital commitment and risk management skills demanded by more complex trades still drive a significant portion of our Equities business. Offering clients both these "high-touch" and "low-touch" capabilities is critical to our strategy. page 18 Goldman Sachs 2006 Annual Report

  • Page 23
    ...Asset Management. Our commitment to the BRICs economies is further reï¬,ected in our significant investments in new offices in Moscow and Mumbai as well as ongoing investment in our businesses in China and Brazil. Countries scaled to 2006 GDP in descending order. Goldman Sachs 2006 Annual Report...

  • Page 24
    ... with rigorous processes through which our Capital Committee reviews principal commitments of the firm's capital and our Commitments Committee reviews the firm's underwriting and distribution activities. Representatives pictured in Jersey City, New Jersey Tim Freshwater, Hong Kong; David Viniar...

  • Page 25
    ...strategy. We take active steps to reinforce it and keep it relevant to clients, new recruits and the current generation of Goldman Sachs people. Our culture is at work as Goldman Sachs teams tackle multifaceted client objectives. It is continually renewed as the firm's senior-most executives invest...

  • Page 26
    ... , ƧƳưƮ ƭƦƧƵ Ƶư ƳƪƨƩƵ : Kevin W. Kennedy, New York; Eric S. Dobkin, New York; Howard A. Silverstein, New York; Michael S. Sherwood, London; E. Gerald Corrigan, New York. ƴƦƢƵƦƥ , ƧƳưƮ ƭƦƧƵ Ƶư ƳƪƨƩƵ : David J. Mastrocola, New York; Robert J. Markwick, London.

  • Page 27
    ... as lead manager. Through immunization programs operated by the GAVI Alliance, it is projected that, in total, the money IFFIm raises will help protect more than 500 million children over the next decade - saving an estimated ten million lives over time. page 22 Goldman Sachs 2006 Annual Report

  • Page 28
    ... Corporate Challenge, New York Cares Day, Change for Charity and Gulf Coast Volunteering. Goldman Sachs volunteers, as part of their Community TeamWorks project, worked to clear a haven for wildlife that was not accessible to the public for over 50 years. Goldman Sachs 2006 Annual Report page 23

  • Page 29
    ... of their careers. We truly believe that Goldman Sachs provides an unsurpassed platform for people who want to take their talents to the next level. Edith Cooper, Managing Director, addresses a group of students at Georgetown University, Washington, D.C. page 24 Goldman Sachs 2006 Annual Report

  • Page 30
    ... I knew. I told him about a backwoods character from Greenwich, Connecticut whom I would face off against his man anytime." - Robert E. Rubin, Co-Senior Partner, 1990 -1991 John L. Weinberg, Co-Senior Partner, 1976-1984; Senior Partner, 1984-1990. Goldman Sachs 2006 Annual Report page 25

  • Page 31
    ... Investments Net Revenues ( in millions ) 2004 2005 2006 Asset Management and Securities Services Net Revenues ( in millions ) +PXGUVOGPV$CPMKPI We provide a broad range of investment banking services to a diverse group of corporations, financial institutions, investment funds, governments...

  • Page 32
    ... ...Equity Capital...Contractual Obligations and Commitments...Risk Management...Risk Management Structure ...Market Risk...Credit Risk ...Credit Risk on Derivatives ...Liquidity and Funding Risk ...Operational Risk ...Recent Accounting Developments ...Management's Report on Internal Control...

  • Page 33
    ... and provide prime brokerage services, financing services and securities lending services to institutional clients, including hedge funds, mutual funds, pension funds and foundations, and to high-net-worth individuals worldwide. • Trading • Asset page 28 Goldman Sachs 2006 Annual Report

  • Page 34
    ... of return on average tangible common shareholders' equity. of Financial Accounting Standards (SFAS) No. 123-R, "Share-Based Payment," focuses primarily on accounting for transactions in which an entity obtains employee services in exchange for share-based payments. In the first quarter of 2006, we...

  • Page 35
    ... and capital to middle-market companies. We also see opportunities to advise governments and investors on the sale and purchase of public infrastructure assets. In addition, we are building a private banking capability as part of our strategy to provide a full range of services to our private wealth...

  • Page 36
    ... of capital in many of our businesses and generally maintain large trading, specialist and investing positions. Market ï¬,uctuations and volatility may adversely affect the value of those positions, including, but not limited to, our interest rate and credit products, currency, commodity and equity...

  • Page 37
    ... these activities represent a significant portion of specific markets, which could restrict liquidity for our positions. Further, our ability to sell assets may be impaired if other market participants are seeking to sell similar assets at the same time. page 32 Goldman Sachs 2006 Annual Report

  • Page 38
    ...nancial statements and is our most critical accounting policy. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Goldman Sachs 2006 Annual Report page 33

  • Page 39
    ... market transactions, changes in financial ratios or changes in the credit ratings of the underlying companies). Where there is evidence supporting a change in the value, we use valuation methodologies such as the present value of known or estimated cash ï¬,ows. page 34 Goldman Sachs 2006 Annual...

  • Page 40
    ... market transactions, it is possible that a different valuation model could produce a materially different estimate of fair value. See "- Recent Accounting Developments" below for a discussion of the impact of SFAS No. 157 on the valuation of financial instruments. Goldman Sachs 2006 Annual Report...

  • Page 41
    ...underlying derivative instrument. In those instances where the underlying instrument does not have a maturity date or either counterparty has the right to settle in cash, the remaining contractual maturity is generally based upon the option expiration date. page 36 Goldman Sachs 2006 Annual Report

  • Page 42
    ... to hedge or sell the common stock underlying our investment in SMFG, see below. (4) Includes interests of $3.28 billion as of November 2006 held by investment funds managed by Goldman Sachs. The fair value of our investment in the ordinary shares of ICBC, which trade on The Stock Exchange of Hong...

  • Page 43
    ... in our trading and principal investing businesses, see "- Risk Management" below. Investment Banking Financial Advisory Underwriting Trading and Principal Investments FICC Equities (1) Principal Investments Asset Management and Securities Services Asset Management (2) Securities Services Total...

  • Page 44
    ... variable annuity and variable life insurance business acquired in 2006. DAC results from commissions paid by Goldman Sachs to the primary insurer (ceding company) on life and annuity reinsurance agreements as compensation to place the business with us and to cover the ceding company's acquisition...

  • Page 45
    ...stock Common shareholders' equity Goodwill and identifiable intangible assets, excluding power contracts Tangible common shareholders' equity $31,048 (2,400) $28,648 (5,013) $23,635 $26,264 (538) $25,726 (4,737) $20,989 $22,975 - $22,975 (4,918) $18,057 page 40 Goldman Sachs 2006 Annual Report

  • Page 46
    ... Banking, and Asset Management and Securities Services. The increase in Trading and Principal Investments reflected significantly higher net revenues in FICC, Equities and Principal Investments. The increase in FICC reï¬,ected particularly strong performances across all major businesses. During 2006...

  • Page 47
    ...of November 2006 of Goldman Sachs' consolidated property management and loan servicing subsidiaries. November 2005 and November 2004 have been adjusted to conform to the current presentation and include 1,198 and 1,014 employees, respectively. (5) Includes page 42 Goldman Sachs 2006 Annual Report

  • Page 48
    ..., non-compensation expenses were 24% higher than 2005, primarily due to higher brokerage, clearing, exchange and distribution fees in Equities and FICC, and increased other expenses, primarily due to costs related to our insurance business, which was acquired in 2006. In addition, market development...

  • Page 49
    ...(ii) $62 million in connection with the establishment of our joint venture in China for the year ended November 2004; and (iii) the amortization of employee initial public offering awards, net of forfeitures, of $19 million for the year ended November 2004. page 44 Goldman Sachs 2006 Annual Report

  • Page 50
    ... offerings, convertible offerings, rights offerings and Rule 144A issues. non-convertible preferred stock, mortgage-backed securities, asset-backed securities and taxable municipal debt. Includes publicly registered and Rule 144A issues. (2) Includes (3) Includes Goldman Sachs 2006 Annual Report...

  • Page 51
    ... revenues of the Asset Management and Securities Services segment. investment banking backlog represents an estimate of our future net revenues from investment banking transactions where we believe that future revenue realization is more likely than not. page 46 Goldman Sachs 2006 Annual Report

  • Page 52
    ...costs related to our insurance business, which was acquired in 2006, and higher levels of business activity. In addition, professional fees were higher, due to increased legal and consulting fees. Pre-tax earnings of $10.60 billion in 2006 increased 70% compared with 2005. Goldman Sachs 2006 Annual...

  • Page 53
    ... Services Our Asset Management and Securities Services segment is divided into two components: • Asset Management - Asset Management provides investment advisory and financial planning services and offers investment products (primarily through separate accounts and funds) across all major asset...

  • Page 54
    ... changes did not impact total assets under management and prior periods have been reclassified to conform to the current presentation. includes hedge funds, private equity, real estate, currencies, commodities and asset allocation strategies. (2) Primarily Goldman Sachs 2006 Annual Report page...

  • Page 55
    ... acquisition of the variable annuity and variable life insurance business of The Hanover Insurance Group, Inc. (2) Includes ȰȮȮȴ Versus ȰȮȮȳ - Net revenues in Asset Management and Securities Services of $6.47 billion for 2006 increased 36% compared with 2005. Asset Management net revenues...

  • Page 56
    ... client securitization transactions; providing secondary market liquidity; making investments in performing and nonperforming debt, equity, real estate and other assets; providing investors with credit-linked and asset-repackaged notes; and receiving or providing letters of credit to satisfy margin...

  • Page 57
    ..., the Chicago Board of Trade, the NYSE, the National Association of Securities Dealers, Inc. and the National Futures Association. Goldman Sachs International, our regulated U.K. broker-dealer, is subject to regulation primarily by the U.K.'s Financial page 52 Goldman Sachs 2006 Annual Report

  • Page 58
    ... program, see "-Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities" in Part ll, Item 5 of the Annual Report on Form 10-K. Preferred Stock - During 2006, Goldman Sachs issued 54,000 shares of perpetual Floating Rate Non-Cumulative Preferred...

  • Page 59
    ... value per common share is computed by dividing tangible common shareholders' equity by the number of common shares outstanding, including restricted stock units granted to employees with no future service requirements. (5,019) $541,033 (4,722) $466,500 page 54 Goldman Sachs 2006 Annual Report

  • Page 60
    Management's Discussion and Analysis contractual obligations and commitments Goldman Sachs has contractual obligations to make future payments related to our unsecured long-term borrowings, secured long-term financings, long-term noncancelable lease agreements and purchase obligations and has ...

  • Page 61
    ... of mortgage-backed and other asset-backed securities, residential and commercial mortgages and corporate debt instruments. See Note 6 to the consolidated financial statements for further information regarding our commitments, contingencies and guarantees. page 56 Goldman Sachs 2006 Annual Report

  • Page 62
    ..., credit and business practice issues related to our asset management business. Business unit risk limits are established by the various risk committees and may be further allocated by the business unit managers to individual trading desks. Trading desk managers Goldman Sachs 2006 Annual Report...

  • Page 63
    ... our long and short financial instruments. These tools include: • risk limits based on a summary measure of market risk exposure referred to as VaR; scenario analyses, stress tests and other analytical tools that measure the potential effects on our trading net revenues of various market events...

  • Page 64
    ... cannot be liquidated or offset with hedges within one day. Changes in VaR between reporting periods are generally due to changes in levels of exposure, volatilities and/or correlations among asset classes. YEAR ENDED NOVEMBER RISK CATEGORIES 2006 2005 2004 Interest rates Equity prices Currency...

  • Page 65
    ... 75-100 >100 DAILY TRADING NET REVENUES (1) Beginning in the fourth quarter of 2006, we excluded daily net revenues from our insurance business and our power generation facilities from this chart. Amounts for the full year have been adjusted accordingly. page 60 Goldman Sachs 2006 Annual Report

  • Page 66
    ... shares of ICBC excludes interests held by investment funds managed by Goldman Sachs. The following table sets forth market risk for positions not included in VaR. These measures do not reï¬,ect diversification benefits across asset categories and, given the differing likelihood of such events...

  • Page 67
    ...nancial condition when management believes a legal right of setoff exists under an enforceable netting agreement. For an OTC derivative, our credit exposure is directly with our counterparty and continues until the maturity or termination of such contract. page 62 Goldman Sachs 2006 Annual Report

  • Page 68
    ... collateral from a counterparty under a master trading agreement that covers multiple products and transactions, we have allocated the collateral ratably based on exposure before giving effect to such collateral. credit-related derivatives. (2) Includes Goldman Sachs 2006 Annual Report page 63

  • Page 69
    ... markets and of Goldman Sachs. Our liquidity model identifies and estimates cash and collateral outï¬,ows over a shortterm horizon in a liquidity crisis, including, but not limited to: • • Crisis upcoming maturities of unsecured debt and letters of credit; page 64 Goldman Sachs 2006 Annual...

  • Page 70
    ... we recognize orderly asset sales may be prudent and necessary in a persistent liquidity crisis. Street Funding Corporation. See "- Contractual Obligations and Commitments" above for a further discussion of the William Street credit extension program. Goldman Sachs 2006 Annual Report page 65

  • Page 71
    ... ) 2006 2005 Mortgage whole loans and collateralized debt obligations (1) Bank loans (2) High-yield securities Emerging market debt securities SMFG convertible preferred stock ICBC ordinary shares (3) Other corporate principal investments (4) Other private equity and restricted public equity...

  • Page 72
    ... to our liquidity. Our creditors include banks, governments, securities lenders, pension funds, insurance companies and mutual funds. We access funding in a variety of markets in the United States, Europe and Asia. We have imposed various internal guidelines on investor concentration, including...

  • Page 73
    ... of the event. It also lists the crisis management team and internal and external parties to be contacted to ensure effective distribution of information. Credit Ratings We rely upon the short-term and long-term debt capital markets to fund a significant portion of our day-to-day operations. The...

  • Page 74
    Management's Discussion and Analysis The following table sets forth our unsecured credit ratings as of November 2006: SHORT-TERM DEBT LONG-TERM DEBT SUBORDINATED DEBT (1) PREFERRED STOCK Dominion Bond Rating Service Limited Fitch, Inc. Moody's Investors Service Standard & Poor's (2) (1) During (2)...

  • Page 75
    ... for Stock-Based Compensation." SFAS No. 123-R focuses primarily on accounting for transactions in which an entity obtains employee services in exchange for share-based payments. Under SFAS No. 123-R, the cost of employee services received in exchange for an award of equity instruments is generally...

  • Page 76
    ...quarter of 2006, we adopted SFAS No. 156, "Accounting for Servicing of Financial Assets - an amendment of FASB Statement No. 140," which permits entities to elect to measure servicing assets and servicing liabilities at fair value and report changes in fair value in earnings. Goldman Sachs acquires...

  • Page 77
    ... registered public accounting firm, as stated in their report appearing on page 73, which expresses unqualified opinions on management's assessment and on the effectiveness of the firm's internal control over financial reporting as of November 24, 2006. page 72 Goldman Sachs 2006 Annual Report

  • Page 78
    ... Shareholders of The Goldman Sachs Group, Inc.: We have completed integrated audits of The Goldman Sachs Group, Inc.'s consolidated financial statements and of its internal control over financial reporting as of November 24, 2006, in accordance with the standards of the Public Company Accounting...

  • Page 79
    ... banking Trading and principal investments Asset management and securities services Interest income Total revenues Interest expense Revenues, net of interest expense Operating expenses Compensation and benefits Brokerage, clearing, exchange and distribution fees Market development Communications...

  • Page 80
    ... assets Total assets Liabilities and shareholders' equity Unsecured short-term borrowings, including the current portion of unsecured long-term borrowings Payables to brokers, dealers and clearing organizations Payables to customers and counterparties Collateralized financings: Securities loaned...

  • Page 81
    ...related to share-based compensation Cash settlement of share-based compensation Balance, end of year Retained earnings Balance, beginning of year Net earnings Dividends and dividend... notes are an integral part of these consolidated financial statements. page 76 Goldman Sachs 2006 Annual Report

  • Page 82
    ..., $1.15 billion and $1.63 billion of debt in connection with business acquisitions for the years ended November 2006, November 2005 and November 2004, respectively. The accompanying notes are an integral part of these consolidated financial statements. Goldman Sachs 2006 Annual Report page 77

  • Page 83
    ... gains/(losses) on available-for-sale securities, net of tax Comprehensive income $9,537 45 (27) (7) 10 $9,558 $5,626 (27) (11) 9 18 $5,615 $4,553 5 - - - $4,558 The accompanying notes are an integral part of these consolidated financial statements. page 78 Goldman Sachs 2006 Annual Report

  • Page 84
    ...principal investments directly and through funds that the firm raises and manages. Asset Management and Securities Services - The firm provides investment advisory and financial planning services and offers investment products (primarily through separate accounts and funds) across all major asset...

  • Page 85
    ... and agency securities, other sovereign government obligations, liquid mortgage products, investment-grade and high-yield corporate bonds, listed equities, money market securities, state, municipal and provincial obligations, and physical commodities. page 80 Goldman Sachs 2006 Annual Report

  • Page 86
    ... portfolio is separated into private investments, investments in the convertible preferred stock of Sumitomo Mitsui Financial Group, Inc. (SMFG) and the ordinary shares of Industrial and Commercial Bank of China Limited (ICBC), and other public investments. Goldman Sachs 2006 Annual Report page 81

  • Page 87
    ... (subject to a ï¬,oor of Â¥105,100). The firm's investment in the ordinary shares of ICBC is carried at fair value using quoted market prices less a liquidity valuation adjustment. The ordinary shares acquired from ICBC are subject to transfer restrictions that, among other things, prohibit any...

  • Page 88
    ... banking overrides (i.e., an increased share of a fund's income and gains) when the return on the funds' investments exceeds certain threshold returns. Overrides are based on investment performance over the life of each merchant banking fund, and future investment Goldman Sachs 2006 Annual Report...

  • Page 89
    ... net earnings applicable to common shareholders Earnings per common share, as reported Basic Diluted Pro forma earnings per common share Basic Diluted $5,609 1,133 $4,553 790 (1,178) $5,564 $11.73 11.21 $11.64 11.12 (947) $4,396 $ 9.30 8.92 $ 8.98 8.61 page 84 Goldman Sachs 2006 Annual Report

  • Page 90
    ...primarily of customer lists, above-market power contracts, specialist rights and the value of business acquired (VOBA) and deferred acquisition costs (DAC) in the firm's insurance subsidiaries, are amortized over their estimated useful lives. Identifiable intangible assets are tested for potential...

  • Page 91
    ... stock units for which future service is required as a condition to the delivery of the underlying common stock. Cash and Cash Equivalents The firm defines cash equivalents as highly liquid overnight deposits held in the ordinary course of business. page 86 Goldman Sachs 2006 Annual Report

  • Page 92
    ...that would be exchanged to sell an asset or transfer a liability in an orderly transaction between market participants. SFAS No. 157 nullifies the consensus reached in EITF Issue No. 02-3 prohibiting the recognition of day one gain or loss on derivative contracts (and hybrid instruments measured at...

  • Page 93
    ... and other money market instruments U.S. government, federal agency and sovereign obligations Corporate and other debt obligations Mortgage whole loans and collateralized debt obligations Investment-grade corporate bonds Bank loans High-yield securities Preferred stock Other Equities and convertible...

  • Page 94
    ... be listed and traded on an exchange. Derivatives may involve future commitments to purchase or sell financial instruments or commodities, or to exchange currency or interest payment streams. The amounts exchanged are based on the specific terms of the contract with reference to specified rates...

  • Page 95
    ... underwriter of the beneficial interests that are sold to investors. The firm derecognizes financial assets transferred in securitizations provided it has relinquished control over such assets. Transferred assets are accounted for at fair value prior to page 90 Goldman Sachs 2006 Annual Report

  • Page 96
    ... 2005, respectively. market-making activities and makes investments in and loans to VIEs that hold performing and nonperforming debt, equity, real estate, power-related and other assets. In addition, the firm utilizes VIEs to provide investors with principalprotected notes, credit-linked notes and...

  • Page 97
    ...-money written put options that provide principal protection to clients invested in various fund products, with risk to the firm mitigated through portfolio rebalancing. Derivatives related to asset repackagings and credit-linked notes consist of interest rate swaps, equity swaps, commodity swaps...

  • Page 98
    ... central bank financings, transfers of financial assets that are accounted for as financings rather than sales (primarily pledged bank loans and mortgage whole loans), consolidated power generation facilities and other structured financing arrangements. Goldman Sachs 2006 Annual Report page...

  • Page 99
    ... and $3.20 billion by other assets (primarily real estate, power generation facilities and related assets, and cash). As of November 2005, $20.51 billion of these financings were collateralized by financial instruments and $3.13 billion by other assets. page 94 Goldman Sachs 2006 Annual Report

  • Page 100
    ... rates, after giving effect to hedging activities, were 5.16% and 3.99% as of November 2006 and November 2005, respectively. The weighted average interest rates as of November 2006 excluded hybrid debt instruments accounted for at fair value under SFAS No. 155. Goldman Sachs 2006 Annual Report...

  • Page 101
    ... agreements, and equity-linked and indexed contracts, to effectively convert a substantial portion of its unsecured long-term borrowings into U.S. dollar-based ï¬,oating rate obligations. Accordingly, the carrying value of unsecured longterm borrowings approximated fair value as of November 2006...

  • Page 102
    ... limited to 95% of the first loss the firm realizes on approved loan commitments, up to a maximum of $1.00 billion. In addition, subject to the satisfaction of certain conditions, upon the firm's request, SMFG will provide protection for 70% of the second loss Goldman Sachs 2006 Annual Report...

  • Page 103
    ... in corporate and real estate investment funds as of November 2006 and November 2005, respectively. Minimum rental payments 2007 2008 2009 2010 2011 2012-thereafter Total Net rent expense 2004 2005 2006 $ 356 359 404 $ 564 387 371 285 250 2,195 $4,052 page 98 Goldman Sachs 2006 Annual Report

  • Page 104
    ..."Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." Such derivative contracts include credit default and total return swaps, written equity and commodity put options, written currency Goldman Sachs 2006 Annual Report page 99

  • Page 105
    ... firm will have to make any material payments under these arrangements, and no liabilities related to these guarantees and indemnifications have been recognized in the consolidated statements of financial condition as of November 2006 and November 2005. page 100 Goldman Sachs 2006 Annual Report

  • Page 106
    ...11, 2006, the Board declared a dividend per preferred share of $391.28, $387.50, $391.28 and $386.17 for Series A, Series B, Series C and Series D preferred stock, respectively, to be paid on February 10, 2007 to preferred shareholders of record on January 26, 2007. Goldman Sachs 2006 Annual Report...

  • Page 107
    ... $10 million on available-for-sale securities held by the firm's bank and insurance subsidiaries and net unrealized gains of $18 million on available-for-sale securities held by investees accounted for under the equity method. Note 8 earnings per common share The computations of basic and diluted...

  • Page 108
    ... Asset Management and Securities Services Asset Management (2) Securities Services Total (1) Primarily (2) )Primarily $ - 125 136 2,381 4 421 117 $ - 125 91 2,390 1 424 117 $3,184 related to SLK LLC (SLK). related to The Ayco Company, L.P. (Ayco). $3,148 Goldman Sachs 2006 Annual Report...

  • Page 109
    ...variable annuity and variable life insurance business acquired in 2006. DAC results from commissions paid by the firm to the primary insurer (ceding company) on life and annuity reinsurance agreements as compensation to place the business with the firm and to cover the ceding company's acquisition...

  • Page 110
    ... on total payments expected to be made less total fees expected to be assessed over the life of the contract. (2) Includes $3.31 billion and $2.04 billion related to consolidated merchant banking funds as of November 2006 and November 2005, respectively. Goldman Sachs 2006 Annual Report page 105

  • Page 111
    ...of year Actual return on plan assets Firm contributions Employee contributions Benefits paid Effect of foreign exchange rates Balance, end of year Prepaid/(accrued) benefit cost Funded status Unrecognized loss Unrecognized transition (asset)/obligation Unrecognized prior service cost Adjustment to...

  • Page 112
    ...2006 2005 2004 U.S. pension Service cost Interest cost Expected return on plan assets Net amortization Total Non-U.S. pension Service cost Interest cost Expected return on plan assets Net amortization Other (1) Total Postretirement Service... pension plan. Goldman Sachs 2006 Annual Report page 107

  • Page 113
    ...-term, high-quality bonds and ensuring that the discount rate does not exceed the yield reported for those indices after adjustment for the duration of the plans' liabilities. The firm's approach in determining the long-term rate of return for plan assets is based upon historical financial market...

  • Page 114
    ... of November 2006, of equity securities, debt securities and other assets, is targeted to maximize the long-term return on assets for a given level of risk. Investment risk is measured and monitored on an ongoing basis by the firm's Retirement Committee through periodic portfolio reviews, meetings...

  • Page 115
    ... date. Compensation expense related to these restricted stock units is recognized over the vesting period. The total value of restricted stock units granted in 2006 and 2005 in order to effect the 25% discount was $72 million and $79 million, respectively. page 110 Goldman Sachs 2006 Annual Report

  • Page 116
    .... aggregate fair value of awards vested during the years ended November 2006, November 2005 and November 2004 was $4.40 billion, $2.05 billion and $1.64 billion, respectively. restricted stock units that were cash settled. (4) The (5) Includes Goldman Sachs 2006 Annual Report page 111

  • Page 117
    ... option-pricing model using the following weighted average assumptions: YEAR ENDED NOVEMBER 2006 2005 2004 Risk-free interest rate Expected volatility Dividend yield Expected life 4.6% 27.5 0.7 7.5 years 4.5% 30.0 0.9 7.5 years 3.4% 35.0 1.0 5 years page 112 Goldman Sachs 2006 Annual Report

  • Page 118
    .... In the ordinary course of business, the firm may also engage in other activities with these funds, including, among others, securities lending, trade execution, trading and custody. See Note 6 for the firm's commitments related to these funds. Goldman Sachs 2006 Annual Report page 113

  • Page 119
    ... and November 2005, respectively. These carryforwards are subject to annual limitations on utilization and will begin to expire in 2010. Acquired alternative minimum tax credit carryforwards of $7 million as of November 2005 were fully utilized in 2006. page 114 Goldman Sachs 2006 Annual Report

  • Page 120
    ... net capital in excess of $1 billion and net capital in excess of $500 million in accordance with the market and credit risk standards of Appendix E of Rule 15c3-1. GS&Co. is also required to notify the SEC in the event that its tentative net capital is less Goldman Sachs 2006 Annual Report page...

  • Page 121
    ... as to the payment of dividends to Group Inc. Note 16 business segments In reporting to management, the firm's operating results are categorized into the following three segments: Investment Banking, Trading and Principal Investments, and Asset Management and Securities Services. Basis of...

  • Page 122
    ... current presentation, with no impact to the firm's reported pre-tax earnings. revenues include net interest as set forth in the table below: YEAR ENDED NOVEMBER 2006 2005 2004 (2) Net ( in millions ) Investment Banking Trading and Principal Investments Asset Management and Securities Services...

  • Page 123
    ...Principal Investments: location of the investment. Asset Management: location of the sales team. Services: location of the primary market for the underlying security. Banking: location of the client and investment banking team. Income, Currency and Commodities, and Equities: location of the trading...

  • Page 124
    ...revenues. Prior periods have been reclassified to conform to the current presentation, with no impact to the firm's reported net earnings. The timing and magnitude of changes in the firm's bonus accruals can have a significant effect on results in a given quarter. (2) Goldman Sachs 2006 Annual...

  • Page 125
    ... 105.40 $95.73 90.08 83.29 88.46 As of January 26, 2007, there were 6,804 holders of record of the firm's common stock. On January 26, 2007, the last reported sales price for the firm's common stock on the New York Stock Exchange was $213.50 per share. page 120 Goldman Sachs 2006 Annual Report

  • Page 126
    ... did not impact total assets under management and prior periods have been reclassified to conform to the current presentation. includes hedge funds, private equity, real estate, currencies, commodities and asset allocation strategies. (6) Primarily Goldman Sachs 2006 Annual Report page 121

  • Page 127
    ...A. Mahoney Charles G.R. Manby David J. Mastrocola Theresa E. McCabe Stephen J. McGuinness John W. McMahon Audrey A. McNiff Wayne L. Moore Donald J. Mulvihill Duncan L. Niederauer Robert J. Pace Stephen R. Pierce John J. Rafter *Partnership Committee Member page 122 Goldman Sachs 2006 Annual Report

  • Page 128
    ... H. Leven Richard J. Levy Tobin V. Levy George C. Liberopoulos Anthony W. Ling Bonnie S. Litt Joseph Longo Peter B. MacDonald Mark G. Machin John V. Mallory Blake W. Mather John J. McCabe James A. McNamara Robert A. McTamaney *Partnership Committee Member Goldman Sachs 2006 Annual Report page 123

  • Page 129
    ... D. Bernard George M. Brady Joseph M. Busuttil Jin Yong Cai ...John E. Waldron Robert P. Wall Michael W. Warren David D. Wildermuth Kevin L. Willens Jon...B. Madoff Puneet Malhi Simon I. Mansfield Naomi Matsuoka Gordon R. McCulloch...Partnership Committee Member page 124 Goldman Sachs 2006 Annual Report

  • Page 130
    ... Kevin S. Gasvoda Paul E. Germain Sarah J. Gray Jason R. Haas Edward G. Hadden Thomas E. Halverson Eric I. Hamou Jan Hatzius Jens D. Hofmann Laura A. Holleman Dane E. Holmes R. Maynard Holt III Leo Z. Huang Robyn A. Huffman Alastair J. Hunt Leonid Ioffe David L. Jasper Goldman Sachs 2006 Annual...

  • Page 131
    ... Gilday Dorothee Blessing Amar Kuchinad Marshall Smith Robert K. Jacobsen Charles F. Adams John Chrysikopoulos ...Elizabeth Chen Chul Chung Denis P. Coleman III Kevin P. Connors Richard N. Cormack James V. ...Lindsay P. LoBue Joseph W. Macaione Ian W. MacLeod page 126 Goldman Sachs 2006 Annual Report

  • Page 132
    ...Ulrika H. Werdelin Teresa M. Wilkinson Oliver C. Will Joel M. Wine Andrew...Robert B. Zoellick Lachlan Edwards Vesna Nevistic Rene Mottas Chang-Po Yang Gail Kreitman Enrique Del Rio Fadi Abuali Kevin... Butland Jon Butler Joseph A. Camarda Roy ...John F. Daly Rajeev ...Goldman Sachs 2006 Annual Report page 127

  • Page 133
    ... Zhai Richard K. Lyons Iain N. Drayton Salvatore T. Lentini Ruibin Meng Gregg J. Felton David N. Frechette Will E. Matthews Brendan M. McGovern Takashi Yoshimura James M. Li Drake Pike Joseph D. Stecher James W. Wight Alexander Dubitsky Xuan Karen Fang page 128 Goldman Sachs 2006 Annual Report

  • Page 134
    ... Curran, A.C. International Advisor to Goldman Sachs JBWere 1Ï,EGU Atlanta Auckland* Bangalore Bangkok Beijing Boston Buenos Aires Calgary Chicago Dallas Dubai Dublin Frankfurt Geneva George Town Hong Kong Houston Jersey City Johannesburg London Los Angeles Madrid Melbourne* Mexico City Miami Milan...

  • Page 135
    ...the Sarbanes-Oxley Act of 2002, have also been filed as exhibits to the firm's 2006 Annual Report on Form 10-K. 0;5'%GTVKπECVKQP Common Stock The common stock of The Goldman Sachs Group, Inc. is listed on the New York Stock Exchange and trades under the ticker symbol "GS." Shareholder Inquiries...

  • Page 136
    ... the letter and spirit of the laws, rules and ethical principles that govern us. Our continued success depends upon unswerving adherence to this standard. III. Our goal is to provide superior returns to our shareholders. Profitability is critical to achieving superior returns, building our capital...

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