Goldman Sachs 2008 Annual Report Download

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2008
GOLDMAN SACHS
a n n ua l r e p o rt

Table of contents

  • Page 1
    2008 GOLDMAN SACHS an n ual re p ort

  • Page 2
    ... share (1) Tangible book value per common share (2) (3) Ending stock price Financial Condition and Other Operating Data Total assets Other secured financings (long-term) Unsecured long-term borrowings Total shareholders' equity Leverage ratio (4) Adjusted leverage ratio (5) Debt to equity ratio...

  • Page 3
    ... record of responsiveness, in 2008, we became a bank holding company (BHC). This was done to allow Goldman Sachs to address market perceptions that placed a premium on the value of oversight by the Federal Reserve Board and to be able to access a broader set of funding alternatives. In our decision...

  • Page 4
    ... revenues, offsetting asset price pressures and related losses in credit and mortgages. Equities produced its second best annual net revenues despite the declines in global equity markets and losses in our principal strategies business. High levels of client activity drove significant opportunities...

  • Page 5
    ... distribution relationships to grow assets under management. Our private wealth management business presents a particularly interesting opportunity. Within this business, we continue to provide our advisors with access to the best intellectual capital Goldman Sachs has to offer. We are building this...

  • Page 6
    .... Our mandate is to grow our business through our core strengths as an advisor, financier, market maker, asset manager and co-investor. The integration of that model and strategy is a powerful and unique one. We believe that Goldman Sachs is well-positioned to realize the very significant near...

  • Page 7
    goldman sachs 2008 annual report / 5 GARY D. COHN LLOYD C. BLANKFEIN President and Chief Operating Officer Chairman and Chief Executive Officer

  • Page 8
    ... continued success. In becoming a bank holding company, Goldman Sachs can now access a broader set of funding alternatives while addressing a market perception that oversight by the Federal Reserve provides greater soundness and safety. While our change in legal status brings greater regulation, it...

  • Page 9
    goldman sachs 2008 annual report / 7 FUNDAMENTALS CONTINUE Goldman Sachs has witnessed the continual evolution of our business and the markets, steering clients through decades of diverse conditions and pioneering the frontiers of a global economy. In the face of change, we remain committed to ...

  • Page 10
    8 / goldman sachs 2008 annual report CLIENT FOCUS CONTINUES

  • Page 11
    ...financial services more broadly. In a time of historic market turbulence, Goldman Sachs' creativity, commitment, global reach, and excellent knowledge of capital markets and corporate finance set a new standard for client service in this landmark transaction. WM. WRIGLEY JR. COMPANY In April 2008...

  • Page 12
    10 / goldman sachs 2008 annual report MARKET LEADERSHIP CONTINUES

  • Page 13
    ...response to these conditions, Goldman Sachs Asset Management (GSAM) in Europe launched AAA-rated US$ Treasury and Euro Government money market funds, which invest exclusively in government and agency securities. The Goldman Sachs US$ Treasury Liquid Reserves Fund debuted in April 2008 with assets of...

  • Page 14
    12 / goldman sachs 2008 annual report STEWARDSHIP CONTINUES

  • Page 15
    ..., while there are a number of things that we wished we had done better in 2008, we are pleased with our relative performance and current positioning, including having one of the strongest balance sheets in the industry. BALANCE SHEET, CAPITAL AND LIQUIDITY With risk management in focus, we made...

  • Page 16
    14 / goldman sachs 2008 annual report RESPONSIBILITY CONTINUES

  • Page 17
    ... offer long-term, tangible value. COMMUNITY TEAMWORKS Community TeamWorks is Goldman Sachs' signature employee volunteer program. Employees volunteer on teambased projects, partnering with nonprofit organizations to make a real difference in our communities. In 2008, more than 25,000 Goldman Sachs...

  • Page 18
    ... sachs 2008 annual report The Goldman Sachs Group, Inc. is a leading global financial services firm providing investment banking, securities and investment management services to a substantial and diversified client base that includes corporations, financial institutions, governments and high...

  • Page 19
    ...Results of Operations ...Financial Overview ...Segment Operating Results ...Geographic Data...Off-Balance-Sheet Arrangements ...Equity Capital ...Contractual Obligations and Commitments ...Risk Management ...Market Risk ...Credit Risk ...Derivatives ...Liquidity and Funding Risk ...Operational Risk...

  • Page 20
    ... The Goldman Sachs Group, Inc. (Group Inc.) is a bank holding company and a leading global investment banking, securities and investment management firm that provides a wide range of services worldwide to a substantial and diversified client base that includes corporations, financial institutions...

  • Page 21
    ... loans and real estate-related loans. We believe that the strength of our capital position will enable us to take advantage of market opportunities as they arise in 2009. (1) Return on average tangible common shareholders' equity (ROTE) is computed by dividing net earnings applicable to common...

  • Page 22
    ...2008, but remained high relative to the major economies. Fixed income and equity markets experienced high levels of volatility, broad-based declines in asset prices and reduced levels of liquidity, particularly during the fourth quarter of our fiscal year. In addition, mortgage and corporate credit...

  • Page 23
    ... United Kingdom, real gross domestic product growth fell to an estimated 0.9% for calendar year 2008, down from 3.0% in 2007. The decline in growth accelerated in the second half of the year as credit market conditions deteriorated and the slowdown in the U.K. housing market intensified. The rate of...

  • Page 24
    ... businesses, commit large amounts of capital to maintain trading positions in interest rate and credit products, as well as currencies, commodities and equities. Because nearly all of these investing and trading positions are markedto-market on a daily basis, declines in asset values directly...

  • Page 25
    ... financial institution profitability and solvency as a result of general market conditions, particularly in the credit markets, together with the forced merger or failure of a number of major commercial and investment banks have at times caused a number of our clients to reduce the level of business...

  • Page 26
    ... / goldman sachs 2008 annual report Management's Discussion and Analysis December 2008 and of the potential impact on Goldman Sachs of a further reduction in our credit ratings, see "- Liquidity and Funding Risk - Credit Ratings" below. Group Inc. has guaranteed the payment obligations of Goldman...

  • Page 27
    ... FASB Staff Position No. FAS 157-3, "Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active." This statement clarifies that determining fair value in an inactive or dislocated market depends on facts and Upon becoming a bank holding company in September 2008...

  • Page 28
    ... of $3.48 billion and $4.30 billion as of November 2008 and November 2007, respectively, 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 Kong, includes the effect of foreign exchange...

  • Page 29
    ... on quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency include most government agency securities, investment-grade corporate bonds, certain mortgage products, certain bank loans and bridge loans, less liquid listed equities...

  • Page 30
    ... variety of inputs, including contractual terms, market prices, yield curves, credit curves, measures of volatility, prepayment rates and correlations of such inputs. For OTC derivatives that trade in liquid markets, such as generic forwards, swaps and options, model inputs can generally be verified...

  • Page 31
    ..., credit ratings and balance sheet ratios). Bank loans and bridge loans and Corporate debt securities and other debt obligations. Valuations are generally based on discounted cash ï¬,ow techniques, for which the key inputs are the amount and timing of expected future cash ï¬,ows, market yields for...

  • Page 32
    ...following table sets forth the fair values of financial assets classified as level 3 within the fair value hierarchy: Level 3 Financial Assets at Fair Value (in millions) Description As of November 2008 (1) 2007 Private equity and real estate fund investments Bank loans and bridge loans (2) $16...

  • Page 33
    ... Services segment. Our Asset Management and Securities Services segment generated record net revenues in 2008 and our Equities component of our Trading and Principal Investments segment had its second best year following its record net revenues in 2007. In addition to "Trading assets, at fair value...

  • Page 34
    ... Assets by Asset Class As of November 2008 Range of Estimated Remaining Lives (in years) 2007 ($ in millions) Carrying Value Carrying Value Customer lists (1) New York Stock Exchange (NYSE) Designated Market Maker (DMM) rights Insurance-related assets (2) Exchange-traded fund (ETF) lead market...

  • Page 35
    goldman sachs 2008 annual report / 33 Management's Discussion and Analysis A prolonged period of weakness in global equity markets and the trading of securities in multiple markets and on multiple exchanges could adversely impact our businesses and impair the value of our identifiable intangible ...

  • Page 36
    ... global economic and market conditions. See "- Certain Risk Factors That May Affect Our Businesses" above and "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for a further discussion of the impact of economic and market conditions on our results of operations. Financial Overview...

  • Page 37
    goldman sachs 2008 annual report / 35 Management's Discussion and Analysis $949 million from real estate principal investments, as well as a $446 million loss from our investment in the ordinary shares of ICBC. In Equities, the decrease compared with particularly strong net revenues in 2007 ...

  • Page 38
    36 / goldman sachs 2008 annual report Management's Discussion and Analysis The following table sets forth our operating expenses and number of employees: Operating Expenses and Employees Year Ended November ($ in millions) 2008 (1) 2007 2006 Compensation and benefits Market development $10,...

  • Page 39
    ..., principally reï¬,ecting higher activity levels in Equities and FICC. The increase in noncompensation expenses related to consolidated entities held for investment purposes primarily reflected the impact of impairment on certain real estate assets during 2008. 2007 versus 2006. Operating expenses...

  • Page 40
    ...by, or funding requirements of, such underlying positions. See Note 18 to the consolidated financial statements for further information regarding our business segments. The cost drivers of Goldman Sachs taken as a whole - compensation, headcount and levels of business activity - are broadly similar...

  • Page 41
    ... withdrawal or a change in the value of a previously announced transaction. Rule 144A and public common stock offerings, convertible offerings and rights offerings. non-convertible preferred stock, mortgage-backed securities, asset-backed securities and taxable municipal debt. Includes publicly...

  • Page 42
    40 / goldman sachs 2008 annual report Management's Discussion and Analysis TRADING AND PRINCIPAL INVESTMENTS Our Trading and Principal Investments segment is divided into three components: â- FICC. We make markets in and trade interest rate and credit products, mortgage-related securities and ...

  • Page 43
    ...broad-based declines in asset values, wider mortgage and corporate credit spreads, reduced levels of liquidity and broad-based investor deleveraging, particularly in the second half of the year. Net revenues in Equities of $9.21 billion for 2008 decreased 19% compared with a particularly strong 2007...

  • Page 44
    ... funds and private investment funds) across all major asset classes to a diverse group of institutions and individuals worldwide and primarily generates revenues in the form of management and incentive fees. Asset Management. Securities Services. Securities Services provides prime brokerage services...

  • Page 45
    ...transfer of $8 billion of money market assets under management to interest-bearing deposits at GS Bank USA. $3 billion of net asset inï¬,ows in connection with the acquisition of our variable annuity and life insurance business. (3) Includes Net revenues in Asset Management and Securities Services...

  • Page 46
    ... vehicles; holding senior and subordinated debt, interests in limited and general partnerships, and preferred and common stock in other nonconsolidated vehicles; entering into interest rate, foreign currency, equity, commodity and credit derivatives, including total return swaps; entering...

  • Page 47
    ... applicable to GS Bank USA, Goldman Sachs and its bank depository institution subsidiaries must meet specific capital guidelines that involve quantitative measures of assets, liabilities and Before we became a bank holding company, we were subject to capital guidelines by the SEC as a Consolidated...

  • Page 48
    46 / goldman sachs 2008 annual report Management's Discussion and Analysis â- The regulatory capital guidelines currently applicable to bank holding companies are based on the Capital Accord of the Basel Committee on Banking Supervision (Basel I), with Basel II to be phased in over time. We are...

  • Page 49
    ..., the Commodity Futures Trading Commission, the Chicago Board of Trade, the Financial Industry Regulatory Authority, Inc. (FINRA) and the National Futures Association. Our depository institution subsidiary, GS Bank USA, a New York State-chartered bank and a member of the Federal Reserve System and...

  • Page 50
    ..." depository institution under the Federal Reserve Board guidelines, GS Bank USA must maintain a Tier 1 capital ratio of at least 6%, a total capital ratio of at least 10%, and a Tier 1 leverage ratio of at least 5%. In connection with the November 2008 asset transfer described below, GS Bank USA...

  • Page 51
    ... and preferred stock, junior subordinated debt issued to trusts and other subordinated debt. We manage our capital requirements principally by setting limits on balance sheet assets and/or limits on risk, in each case at both the consolidated and business unit levels. We attribute capital usage...

  • Page 52
    ...November 2008, Goldman Sachs had 10.2 million shares of perpetual preferred stock issued and outstanding as set forth in the following table: Preferred Stock by Series Shares Issued Shares Authorized Earliest Redemption Date Redemption Value (in millions) Series Dividend Preference Dividend Rate...

  • Page 53
    goldman sachs 2008 annual report / 51 Management's Discussion and Analysis Each share of Series H Preferred Stock issued and outstanding has a par value of $0.01, has a liquidation preference of $1,000 and is redeemable at our option, subject to the approval of the Federal Reserve Board, at a ...

  • Page 54
    ...2007, respectively. (8) Tangible book 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. equity capital equals total shareholders...

  • Page 55
    ... consolidated statements of financial condition and include $7.85 billion accounted for at fair value under SFAS No. 159. estimated future interest payments related to unsecured long-term borrowings and secured long-term financings based on applicable interest rates as of November 2008. Includes...

  • Page 56
    ... short-term in nature, as borrowers often seek to replace them with other funding sources. Included within non-investment-grade commitments as of November 2008 was $2.07 billion of exposure to leveraged lending capital market transactions, $164 million related to commercial real estate transactions...

  • Page 57
    ... William Street Credit Corporation, GS Bank USA or Goldman Sachs Credit Partners L.P. The commitments extended by Commitment Corp. are supported, in part, by funding raised by William Street Funding Corporation (Funding Corp.), another consolidated wholly owned subsidiary of GS Bank USA. The assets...

  • Page 58
    ... inventory position limits and has oversight responsibility for liquidity risk, the size and composition of our balance sheet and capital base, and our credit ratings. The Finance Committee regularly reviews our funding position and capitalization and makes adjustments in light of current events...

  • Page 59
    ... risk to Goldman Sachs. In addition to applying business judgment, senior management uses a number of quantitative tools to manage our exposure to market risk for "Trading assets, at fair value" and "Trading liabilities, at fair value" in the consolidated statements of financial condition. These...

  • Page 60
    ... the fair value option was elected was $1 million (including hedges) as of November 2008. Daily VaR (1) (in millions) Risk Categories As of November 2008 2007 Year Ended November 2008 High Low Interest rates Equity prices Currency rates Commodity prices Diversification effect (2) Total (1) Certain...

  • Page 61
    goldman sachs 2008 annual report / 59 Management's Discussion and Analysis Our daily VaR increased to $244 million as of November 2008 from $134 million as of November 2007, primarily due to an increase in the interest rate category and a reduction in the diversification benefit across risk ...

  • Page 62
    ... positions in these portfolios, which are accounted for at fair value, we make investments accounted for under the equity method and we also make direct investments in real estate, both of which are included in "Other assets" in the consolidated statements of financial condition. Direct investments...

  • Page 63
    ... (4% of total assets), respectively, of U.S. government and federal agency obligations included in "Trading assets, at fair value" and "Cash and securities segregated for regulatory and other purposes" in the consolidated statements of financial condition. As of November 2008 and November 2007, we...

  • Page 64
    .../ goldman sachs 2008 annual report Management's Discussion and Analysis The fair value of our derivative contracts is reï¬,ected net of cash paid or received pursuant to credit support agreements and is reported on a net-by-counterparty basis in our consolidated statements of financial condition...

  • Page 65
    goldman sachs 2008 annual report / 63 Management's Discussion and Analysis OTC Derivatives (in millions) Assets 0 - 12 Months 1-5 Years As of November 2007 5 - 10 Years 10 Years or Greater Total Contract Type Interest rates Credit derivatives Currencies Commodities Equities Netting across ...

  • Page 66
    64 / goldman sachs 2008 annual report Management's Discussion and Analysis The following tables set forth the distribution, by credit rating, of our exposure with respect to OTC derivatives by remaining contractual maturity, both before and after consideration of the effect of collateral and ...

  • Page 67
    goldman sachs 2008 annual report / 65 Management's Discussion and Analysis Liquidity and Funding Risk Liquidity is of critical importance to companies in the financial services sector. Most failures of financial institutions have occurred in large part due to insufficient liquidity resulting ...

  • Page 68
    ... fund our balance sheet for at least one year. The target amount of our total capital is based on an internal liquidity model, which incorporates, among other things, the following long-term financing requirements: â- the portion of trading assets that we believe could not be funded on a secured...

  • Page 69
    ...instruments we hold. CONSERVATIVE LIABILITY STRUCTURE Mortgage and other asset-backed loans and securities Bank loans and bridge loans (1) Emerging market debt securities High-yield and other debt obligations Private equity and real estate fund investments (2) Emerging market equity securities ICBC...

  • Page 70
    ...not rely on funding through the Federal Reserve Bank discount window in our liquidity modeling and stress testing, we maintain policies and procedures necessary to access this funding. We seek to maintain broad and diversified funding sources globally for both secured and unsecured funding. We make...

  • Page 71
    ...financial services companies such as Group Inc., GS&Co., GSI and GS Bank USA. Some of these steps include: â- â- In October 2008, the Federal Reserve Board established the Commercial Paper Funding Facility (CPFF) to serve as a funding backstop to facilitate the issuance of term commercial paper...

  • Page 72
    ... of a liquidity event on Goldman Sachs based on some of the risks identified above and outlines which and to what extent liquidity maintenance activities should be implemented based on the severity of the event. CREDIT RATINGS We rely upon the short-term and long-term debt capital markets to fund...

  • Page 73
    goldman sachs 2008 annual report / 71 Management's Discussion and Analysis On December 16, 2008, Moody's Investors Service affirmed Group Inc.'s Short-Term Debt rating and lowered Group Inc.'s ratings on Long-Term Debt (from Aa3 to A1), Subordinated Debt (from A1 to A2) and Preferred Stock (from ...

  • Page 74
    72 / goldman sachs 2008 annual report Management's Discussion and Analysis Recent Accounting Developments Operational Risk Operational risk relates to the risk of loss arising from shortcomings or failures in internal processes, people or systems, or from external events. Operational risk can ...

  • Page 75
    .... FASB Staff Position No. FAS 157-3. In October 2008, the FASB issued FSP No. FAS 157-3, "Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active." FSP No. FAS 157-3 clarifies the application of SFAS No. 157 in an inactive market, without changing its existing...

  • Page 76
    ...goldman sachs 2008 annual report Management's Report on Internal Control over Financial Reporting Management of The Goldman Sachs Group, Inc., together with its consolidated subsidiaries (the firm), is responsible for establishing and maintaining adequate internal control over financial reporting...

  • Page 77
    ... the related consolidated statements of earnings, changes in shareholders' equity, cash flows and comprehensive income present fairly, in all material respects, the financial position of The Goldman Sachs Group, Inc. and its subsidiaries (the Company) at November 28, 2008 and November 30, 2007, and...

  • Page 78
    76 / goldman sachs 2008 annual report Consolidated Statements of Earnings Year Ended November (in millions, except per share amounts) 2008 2007 2006 Revenues Investment banking Trading and principal investments Asset management and securities services Interest income Total revenues Interest ...

  • Page 79
    ... sachs 2008 annual report / 77 Consolidated Statements of Financial Condition As of November (in millions, except share and per share amounts) 2008 2007 Assets Cash and cash equivalents Cash and securities segregated for regulatory and other purposes (includes $78,830 and $94,018 at fair value...

  • Page 80
    78 / goldman sachs 2008 annual report Consolidated Statements of Changes in Shareholders' Equity Year Ended November (in millions, except per share amounts) 2008 2007 2006 Preferred stock Balance, beginning of year Issued Preferred stock accretion Balance, end of year Common stock, par value $0....

  • Page 81
    ... brokers, dealers and clearing organizations Net payables to customers and counterparties Securities borrowed, net of securities loaned Securities sold under agreements to repurchase, net of securities purchased under agreements to resell and federal funds sold Trading assets, at fair value Trading...

  • Page 82
    80 / goldman sachs 2008 annual report Consolidated Statements of Comprehensive Income Year Ended November (in millions) 2008 2007 2006 Net earnings Currency translation adjustment, net of tax Pension and postretirement liability adjustment, net of tax Net gains/(losses) on cash ï¬,ow hedges, net...

  • Page 83
    ... 2008 annual report / 81 Notes to Consolidated Financial Statements NOTE 1 NOTE 2 Description of Business The Goldman Sachs Group, Inc. (Group Inc.), a Delaware corporation, is a bank holding company and, together with its consolidated subsidiaries (collectively, the firm), a leading global...

  • Page 84
    82 / goldman sachs 2008 annual report Notes to Consolidated Financial Statements other factors, the VIE's capital structure, contractual terms, which interests create or absorb variability, related party relationships and the design of the VIE. Where qualitative analysis is not conclusive, the ...

  • Page 85
    goldman sachs 2008 annual report / 83 Notes to Consolidated Financial Statements Trading Assets and Trading Liabilities. Substantially all trading assets and trading liabilities are reï¬,ected in the consolidated statements of financial condition at fair value, pursuant principally to: â- ...

  • Page 86
    ... corporate bonds, certain mortgage products, certain bank loans and bridge loans, less liquid listed equities, state, municipal and provincial obligations and certain money market securities and loan commitments. Such instruments are generally classified within level 2 of the fair value hierarchy...

  • Page 87
    ...'s best estimate is used. Recent market conditions, particularly in the fourth quarter of 2008 (characterized by dislocations between asset classes, elevated levels of volatility, and reduced price transparency), have increased the level of management judgment required to value cash trading...

  • Page 88
    .... Hybrid Financial Instruments. Transfers of Financial Assets. â- Securities borrowed and loaned are generally collateralized by cash, securities or letters of credit. The firm receives securities borrowed, makes delivery of securities loaned, monitors the market value of securities borrowed and...

  • Page 89
    goldman sachs 2008 annual report / 87 Notes to Consolidated Financial Statements Premiums earned for underwriting property catastrophe reinsurance are recognized within "Trading and principal investments" in the consolidated statements of earnings over the coverage period, net of premiums ceded ...

  • Page 90
    ... sachs 2008 annual report Notes to Consolidated Financial Statements impairment whenever events or changes in circumstances suggest that an asset's or asset group's carrying value may not be fully recoverable in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived...

  • Page 91
    goldman sachs 2008 annual report / 89 Notes to Consolidated Financial Statements Earnings Per Common Share (EPS) Basic EPS is calculated by dividing net earnings applicable to common shareholders by the weighted average number of common shares outstanding. Common shares outstanding includes ...

  • Page 92
    90 / goldman sachs 2008 annual report Notes to Consolidated Financial Statements FASB Staff Position No. FAS 157-3. In October 2008, the FASB issued FSP No. FAS 157-3, "Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active." FSP No. FAS 157-3 clarifies the...

  • Page 93
    ...derivatives to manage a long or short risk position. As of November 2008 (in millions) Assets Liabilities 2007 Assets Liabilities Commercial paper, certificates of deposit, time deposits and other money market instruments U.S. government, federal agency and sovereign obligations Mortgage and other...

  • Page 94
    ... / goldman sachs 2008 annual report Notes to Consolidated Financial Statements The following tables set forth by level within the fair value hierarchy "Trading assets, at fair value," "Trading liabilities, at fair value" and other financial assets and financial liabilities accounted for at fair...

  • Page 95
    goldman sachs 2008 annual report / 93 Notes to Consolidated Financial Statements Financial Liabilities at Fair Value as of November 2008 (in millions) Level 1 Level 2 Level 3 Netting and Collateral Total U.S. government, federal agency and sovereign obligations Mortgage and other asset-backed ...

  • Page 96
    94 / goldman sachs 2008 annual report Notes to Consolidated Financial Statements Financial Assets at Fair Value as of November 2007 (in millions) Level 1 Level 2 Level 3 Netting and Collateral Total Commercial paper, certificates of deposit, time deposits and other money market instruments U.S....

  • Page 97
    ...sachs 2008 annual report / 95 Notes to Consolidated Financial Statements Financial Liabilities at Fair Value as of November 2007 (in millions) Level 1 Level 2 Level 3 Netting and Collateral Total U.S. government, federal agency and sovereign obligations Bank loans and bridge loans Corporate debt...

  • Page 98
    ... November 2007. reï¬,ects transfers from level 2 within the fair value hierarchy of loans and securities backed by commercial real estate, reï¬,ecting reduced price transparency for these financial instruments. all is reported in "Trading and principal investments" in the consolidated statements of...

  • Page 99
    goldman sachs 2008 annual report / 97 Notes to Consolidated Financial Statements Impact of Credit Spreads On an ongoing basis, the firm realizes gains or losses relating to changes in credit risk on derivative contracts through changes in credit mitigants or the sale or unwind of the contracts. ...

  • Page 100
    98 / goldman sachs 2008 annual report Notes to Consolidated Financial Statements As of November 2008, the fair value of unfunded lending commitments for which the fair value option was elected was a liability of $3.52 billion and the related total contractual amount of these lending commitments ...

  • Page 101
    goldman sachs 2008 annual report / 99 Notes to Consolidated Financial Statements values or contractually required cash ï¬,ows are derived from the price of some other security or index. However, certain commodity-related contracts are included in the firm's derivatives disclosure, as these ...

  • Page 102
    .../ goldman sachs 2008 annual report Notes to Consolidated Financial Statements The fair value of the firm's derivative contracts is reï¬,ected net of cash paid or received pursuant to credit support agreements and is reported on a net-by-counterparty basis in the firm's consolidated statements of...

  • Page 103
    ... in "Trading assets, at fair value" in the consolidated statements of financial condition and were $80.85 billion and $156.92 billion as of November 2008 and November 2007, respectively. Other assets (primarily real estate and cash) owned and pledged in connection with other secured financings...

  • Page 104
    ... fair value" in the consolidated statements of financial condition. The following table sets forth the amount of financial assets the firm securitized, as well as cash ï¬,ows received on retained interests: Year Ended November (in millions) 2008 2007 Other secured financings (short-term) (long...

  • Page 105
    ... related to servicing activities. Mortgage servicing rights are included in "Trading assets, at fair value" in the consolidated statements of financial condition and are classified within level 3 of the fair value hierarchy. The following table sets forth changes in the firm's mortgage servicing...

  • Page 106
    104 / goldman sachs 2008 annual report Notes to Consolidated Financial Statements estate, power-related and other assets. In addition, the firm utilizes VIEs to provide investors with principal-protected notes, credit-linked notes and asset-repackaged notes designed to meet their objectives. ...

  • Page 107
    ... Loss (2) 2007 Maximum Exposure to Loss (2) (in millions) VIE Assets (1) VIE Assets (1) Real estate, credit-related and other investing Municipal bond securitizations CDOs, mortgage-backed and other asset-backed Foreign exchange and commodities Principal-protected notes Total (1) Consolidated...

  • Page 108
    .../ goldman sachs 2008 annual report Notes to Consolidated Financial Statements NOTE 6 Short-Term Borrowings As of November 2008, short-term borrowings were $73.89 billion, comprised of $21.23 billion included in "Other secured financings" in the consolidated statement of financial condition and...

  • Page 109
    goldman sachs 2008 annual report / 107 Notes to Consolidated Financial Statements NOTE 7 Long-Term Borrowings As of November 2008, long-term borrowings were $185.68 billion, comprised of $17.46 billion included in "Other secured financings" in the consolidated statements of financial condition...

  • Page 110
    ... sachs 2008 annual report Notes to Consolidated Financial Statements The effective weighted average interest rates for unsecured long-term borrowings are set forth below: As of November 2008 ($ in millions) Amount Rate 2007 Amount Rate Fixed rate obligations Group Inc. Subsidiaries Floating rate...

  • Page 111
    goldman sachs 2008 annual report / 109 Notes to Consolidated Financial Statements Junior Subordinated Debt Issued to a Trust in Connection with Trust Preferred Securities. NOTE 8 Group Inc. issued $2.84 billion of junior subordinated debentures in 2004 to Goldman Sachs Capital I (Trust), a ...

  • Page 112
    ... 2008 and corporate bank loans and commercial mortgages as of November 2007. Warehouse financing. Included within non-investment-grade commitments as of November 2008 was $2.07 billion of exposure to leveraged lending capital market transactions, $164 million related to commercial real estate...

  • Page 113
    goldman sachs 2008 annual report / 111 Notes to Consolidated Financial Statements Other. The firm had other purchase commitments of $260 million as of November 2008 and $1.76 billion (including a $1.34 billion commitment for the acquisition of Litton Loan Servicing LP) as of November 2007. Leases...

  • Page 114
    112 / goldman sachs 2008 annual report Notes to Consolidated Financial Statements As of November 2008 and November 2007, derivative contracts that meet the definition of a guarantee include written equity and commodity put options, written currency contracts and interest rate caps, floors and ...

  • Page 115
    goldman sachs 2008 annual report / 113 Notes to Consolidated Financial Statements The firm has established trusts, including Goldman Sachs Capital I, II and III, and other entities for the limited purpose of issuing securities to third parties, lending the proceeds to the firm and entering into ...

  • Page 116
    ... goldman sachs 2008 annual report Notes to Consolidated Financial Statements NOTE 9 Shareholders' Equity Common and Preferred Equity In September 2008, Group Inc. completed a public offering of 46.7 million shares of common stock at $123.00 per share for proceeds of $5.75 billion. In October 2008...

  • Page 117
    goldman sachs 2008 annual report / 115 Notes to Consolidated Financial Statements As of November 2008, the firm had 10.2 million shares of perpetual preferred stock issued and outstanding as set forth in the following table: Dividend Preference Shares Issued Shares Authorized Earliest Redemption...

  • Page 118
    116 / goldman sachs 2008 annual report Notes to Consolidated Financial Statements In 2007, the Board authorized 17,500.1 shares of perpetual Non-Cumulative Preferred Stock, Series E, and 5,000.1 shares of perpetual Non-Cumulative Preferred Stock, Series F, in connection with the APEX issuance. ...

  • Page 119
    ..., except per share amounts) 2008 2007 2006 Numerator for basic and diluted EPS - net earnings applicable to common shareholders Denominator for basic EPS - weighted average number of common shares Effect of dilutive securities (1) Restricted stock units Stock options Dilutive potential common...

  • Page 120
    ... assets" in the consolidated statements of financial condition: As of November (in millions) 2008 2007 Investment Banking Underwriting Trading and Principal Investments FICC Equities (1) Principal Investments Asset Management and Securities Services Asset Management (2) Securities Services Total...

  • Page 121
    goldman sachs 2008 annual report / 119 Notes to Consolidated Financial Statements Substantially all of the firm's identifiable intangible assets are considered to have finite lives and are amortized over their estimated lives. The weighted average remaining life of the firm's identifiable ...

  • Page 122
    120 / goldman sachs 2008 annual report Notes to Consolidated Financial Statements NOTE 13 Employee Benefit Plans The firm sponsors various pension plans and certain other postretirement benefit plans, primarily healthcare and life insurance. The firm also provides certain benefits to former ...

  • Page 123
    goldman sachs 2008 annual report / 121 Notes to Consolidated Financial Statements The following table provides a summary of the changes in the plans' benefit obligations and the fair value of assets for November 2008 and November 2007 and a statement of the funded status of the plans as of ...

  • Page 124
    122 / goldman sachs 2008 annual report Notes to Consolidated Financial Statements The accumulated benefit obligation for all defined benefit pension plans was $769 million and $1.05 billion as of November 2008 and November 2007, respectively. For plans in which the accumulated benefit ...

  • Page 125
    ...-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 126
    ...asset allocation as of November 2008, 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...

  • Page 127
    ... 2008 annual report / 125 Notes to Consolidated Financial Statements NOTE 14 Employee Incentive Plans Stock Incentive Plan The firm sponsors a stock incentive plan, The Goldman Sachs Amended and Restated Stock Incentive Plan (Amended SIP), which provides for grants of incentive stock options...

  • Page 128
    126 / goldman sachs 2008 annual report Notes to Consolidated Financial Statements Restricted Stock Units The firm issues restricted stock units to employees under the Amended SIP, primarily in connection with year-end compensation and acquisitions. Restricted stock units are valued based on the ...

  • Page 129
    goldman sachs 2008 annual report / 127 Notes to Consolidated Financial Statements Stock Options Stock options granted to employees generally vest as outlined in the applicable stock option agreement and generally first become exercisable on or after the third anniversary of the grant date. Other...

  • Page 130
    .../ goldman sachs 2008 annual report Notes to Consolidated Financial Statements The weighted average fair value of options granted for 2007 and 2006 was $51.04 and $49.96 per option, respectively. Fair value was estimated as of the grant date based on a Black-Scholes option-pricing model principally...

  • Page 131
    goldman sachs 2008 annual report / 129 Notes to Consolidated Financial Statements NOTE 16 Income Taxes The components of the net tax expense reï¬,ected in the consolidated statements of earnings are set forth below: Year Ended November (in millions) 2008 2007 2006 Current taxes U.S. federal ...

  • Page 132
    ... by major jurisdiction: Earliest Tax Year Subject to Examination Jurisdiction U.S. Federal New York State and City United Kingdom Japan Hong Kong Korea (1) IRS 2005 (1) 2004 (2) 2005 2005 2002 2003 Balance at December 1, 2007 Increases based on tax positions related to the current year...

  • Page 133
    ...stock units and the exercise of options, were credited directly to "Additional paid-in capital" in the consolidated statements of financial condition and changes in shareholders' equity. NOTE 17 Regulation On September 21, 2008, Group Inc. became a bank holding company under the U.S. Bank Holding...

  • Page 134
    132 / goldman sachs 2008 annual report Notes to Consolidated Financial Statements â- The regulatory capital guidelines currently applicable to bank holding companies are based on the Capital Accord of the Basel Committee on Banking Supervision (Basel I), with Basel II to be phased in over time....

  • Page 135
    goldman sachs 2008 annual report / 133 Notes to Consolidated Financial Statements November 2008 and November 2007, respectively. GS Bank Europe, a wholly owned credit institution, is regulated by the Irish Financial Services Regulatory Authority and is subject to minimum capital requirements. As ...

  • Page 136
    134 / goldman sachs 2008 annual report Notes to Consolidated Financial Statements Segment Operating Results Management believes that the following information provides a reasonable representation of each segment's contribution to consolidated pre-tax earnings and total assets: As of or for the ...

  • Page 137
    ... Banking: location of the client and investment banking team. Fixed Income, Currency and Commodities, and Equities: location of the trading desk. Principal Investments: location of the investment. Asset Management: location of the sales team. Securities Services: location of the primary market...

  • Page 138
    ...interest expense: Year Ended November (in millions) 2008 (1) 2007 2006 Interest income Deposits with banks Securities borrowed, securities purchased under agreements to resell, at fair value, and federal funds sold Trading assets Other interest (2) Total interest income Interest expense Deposits...

  • Page 139
    ... to Consolidated Financial Statements NOTE 20 Group Inc. - Condensed Statements of Cash Flows Year ended November (in millions) 2008 2007 2006 Parent Company Group Inc. - Condensed Statements of Earnings Year ended November (in millions) 2008 2007 2006 Revenues Dividends from bank subsidiary...

  • Page 140
    138 / goldman sachs 2008 annual report Notes to Consolidated Financial Statements NOTE 21 Subsequent Events On December 15, 2008, the Board approved a change in the firm's fiscal year-end from the last Friday of November to the last Friday of December. The change is effective for the firm's ...

  • Page 141
    ... Total revenues Interest expense Revenues, net of interest expense Operating expenses (1) Pre-tax earnings Provision for taxes Net earnings Preferred stock dividends Net earnings applicable to common shareholders Earnings per common share Basic Diluted Dividends declared and paid per common share...

  • Page 142
    ... stock on the New York Stock Exchange was $73.05 per share. Common Stock Price Performance The following graph compares the performance of an investment in the firm's common stock from November 28, 2003 through November 28, 2008, with the S&P 500 Index and the S&P 500 Financial Index. The graph...

  • Page 143
    ...2008 2007 2006 2005 2004 Income statement data (in millions) Total revenues Interest expense Revenues, net of interest expense Compensation and benefits Other operating expenses Pre-tax earnings Balance sheet data (in millions) Total assets Other secured financings (long-term) Unsecured long-term...

  • Page 144
    ...November 2008 Average balance Average rate Average balance 2007 Average rate Average balance 2006 Average rate (in millions, except rates) Interest Interest Interest Assets Deposits with banks U.S. Non-U.S. Securities borrowed, securities purchased under agreements to resell, at fair value, and...

  • Page 145
    ... 2008 Average balance Average rate Average balance 2007 Average rate Average balance 2006 Average rate (in millions, except rates) Interest Interest Interest Shareholders' equity Preferred stock Common stock Total shareholders' equity Total liabilities, preferred stock and shareholders' equity...

  • Page 146
    ...) Volume Rate Net change 2007 versus 2006 Increase (decrease) due to change in: Volume Rate Net change Interest-earning assets Deposits with banks U.S. Non-U.S. Securities borrowed, securities purchased under agreements to resell, at fair value and federal funds sold U.S. Non-U.S. Trading assets...

  • Page 147
    ... and other money market instruments U.S. governments, federal agency and sovereign obligations Mortgage and other asset-backed loans and securities Corporate debt securities and other debt obligations Total available-for-sale securities Available-for-sale securities, November 2007 Commercial paper...

  • Page 148
    ... $100,000. Ratios The following table sets forth selected financial ratios: Year Ended November 2008 2007 2006 Net income to average assets Return on common shareholders' equity (1) Return on total shareholders' equity (2) Total average equity to average assets Dividend payout ratio (3) (1) Based...

  • Page 149
    goldman sachs 2008 annual report / 147 Supplemental Financial Information Short-term and Other Borrowed Funds (1) The following table sets forth a summary of the firm's securities loaned and securities sold under agreements to repurchase and short-term borrowings as of or for the years ended ...

  • Page 150
    148 / goldman sachs 2008 annual report Board Members, Officers and Directors BOARD OF DIRECTORS Lloyd C. Blankfein Chairman and Chief Executive Officer Gary D. Cohn President and Chief Operating Officer John H. Bryan Retired Chairman and Chief Executive Officer of Sara Lee Corporation Claes ...

  • Page 151
    goldman sachs 2008 annual report / 149 Board Members, Officers and Directors David J. Greenwald* Roger C. Harper Maykin Ho Timothy E. Hodgson Robert D. Hormats James A. Hudis David J. Kostin Paulo C. Leme Hughes B. Lepic Robert J. Markwick Kathy M. Matsui Geraldine F. McManus Jeffrey M. Moslow ...

  • Page 152
    ...goldman sachs 2008 annual report Board Members... Shefter Guy C. Slimmon Joseph F. Squeri Christoph W. ... Camu John W. Cembrook Robert J. Ceremsak James R. Cielinski William J....John A. Sebastian Peter A. Seccia Peter D. Selman Heather K. Shemilt Gavin Simms Alec P. Stais Laurence Stein Patrick M. Street...

  • Page 153
    goldman sachs 2008 annual report / 151 Board Members, Officers and Directors Reinhard B. Koester Stefan R. Bollinger Linnea K. Conrad Gregory B. Carey Paul R. Aaron Koichiro Abe Andrew W. Alford Fareed T. Ali William...Chi Chung Lee Joseph B. Lee Eugene H. Leouzon Wayne M. Leslie John S. Lindfors ...

  • Page 154
    152 / goldman sachs 2008 annual report Board Members, Officers and Directors Francisco X. Gonzalez Jason A. Gottlieb Maria M. Grant Christoph Gugelmann John D. Haase Mark K. Hancock Martin Hintze Todd Hohman James P. Houghton Bradley Hunt Christopher E. Hussey Etsuko Kanayama Hiroyuki Kaneda ...

  • Page 155
    goldman sachs 2008 annual report / 153 Board Members...John E. McGarry Shane McKenna Penny A. McSpadden Celine-Marie...Robinson Philippa A. Rogers Michael E. Ronen...Tierens Nadia Titarchuk Joseph K. Todd ...William L. Blais Alla Gil Michael S. Swell Tamim H. Al-Kawari John C. Shaffer Damien Liebaut William...

  • Page 156
    ... goldman sachs 2008 annual report Board Members,...John G. Creaton Cecile Crochu Gavin S. Da Cunha Lauren Dang Anne Marie B. Darling Paul S. Davies Andrew K. Davilman Bruno P. De Kegel Matthew P. DeFusco Daniel Deng Thomas Deng Jeffrey L. Dodge Jonathan G. Donne William P. Douglas Andrew J. Duke Mary...

  • Page 157
    goldman sachs 2008 annual report / 155 Board Members...Elizabeth S. Wahab Sherif J. Wahba John M. Wang Zhixue Josh Wang ...Mary Pang Toshio Okumura Andre Laport Ribeiro Giuseppe Bivona Joseph Chow Beatriz Sanchez Ramon Perez Ricardo Mora Joseph... Steven Angel Anna ...Jason H. Brauth William Brennan Justin ...

  • Page 158
    156 / goldman sachs 2008 annual report Board Members, Officers...John G. Madsen Brian M. Margulies Michael C. Marsh Kim Mathew David W. May Adam J. Mazur Ryan L. McCorvie Robert A. McEvoy William T. McIntire Christopher G. Mckey Christopher L. Mikosh Paul J. Miller Girish Mithran Yutaka Miura Joseph...

  • Page 159
    ... Boston Buenos Aires Calgary Chicago Dallas Doha Dubai Dublin Frankfurt Geneva George Town Hong Kong Houston Jersey City Johannesburg London Los Angeles Madrid Melbourne* Mexico City Miami Milan Moscow Mumbai New York Paris Philadelphia Princeton Salt Lake City San Francisco São Paulo Seattle...

  • Page 160
    ...NYSE corporate governance listing standards. TRANSFER AGENT AND REGISTRAR FOR COMMON STOCK Questions from registered shareholders of The Goldman Sachs Group, Inc. regarding lost or stolen stock certificates, dividends, changes of address and other issues related to registered share ownership should...

  • Page 161
    .... Profitability is critical to achieving superior returns, building our capital, and attracting and keeping our best people. Significant employee stock ownership aligns the interests of our employees and our shareholders. 4 We consider our size an asset that we try hard to preserve. We want to be...

  • Page 162
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