x
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QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
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For the quarterly period ended February 24, 2006 | ||
or | ||
o
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
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For the transition period to |
Delaware | 13-4019460 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
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85 Broad Street, New York, NY | 10004 | |
(Address of principal executive offices) | (Zip Code) |
1
Three Months | |||||||||
Ended February | |||||||||
2006 | 2005 | ||||||||
(in millions, except | |||||||||
per share amounts) | |||||||||
Revenues
|
|||||||||
Investment banking
|
$ | 1,470 | $ | 873 | |||||
Trading and principal investments
|
6,687 | 4,141 | |||||||
Asset management and securities
services
|
1,554 | 774 | |||||||
Interest income
|
7,535 | 4,176 | |||||||
Total revenues
|
17,246 | 9,964 | |||||||
Interest expense
|
6,813 | 3,449 | |||||||
Cost of power generation
|
98 | 110 | |||||||
Revenues, net of interest expense
and cost of power generation
|
10,335 | 6,405 | |||||||
Operating expenses
|
|||||||||
Compensation and benefits
|
5,301 | 3,203 | |||||||
Brokerage, clearing and exchange
fees
|
351 | 252 | |||||||
Market development
|
100 | 82 | |||||||
Communications and technology
|
124 | 118 | |||||||
Depreciation and amortization
|
125 | 118 | |||||||
Amortization of identifiable
intangible assets
|
34 | 31 | |||||||
Occupancy
|
193 | 148 | |||||||
Professional fees
|
109 | 96 | |||||||
Other expenses
|
309 | 212 | |||||||
Total non-compensation expenses
|
1,345 | 1,057 | |||||||
Total operating expenses
|
6,646 | 4,260 | |||||||
Pre-tax earnings
|
3,689 | 2,145 | |||||||
Provision for taxes
|
1,210 | 633 | |||||||
Net earnings
|
2,479 | 1,512 | |||||||
Preferred stock dividends
|
26 | | |||||||
Net earnings applicable to common
shareholders
|
$ | 2,453 | $ | 1,512 | |||||
Earnings per common
share
|
|||||||||
Basic
|
$ | 5.36 | $ | 3.06 | |||||
Diluted
|
5.08 | 2.94 | |||||||
Average common shares
outstanding
|
|||||||||
Basic
|
457.3 | 494.3 | |||||||
Diluted
|
483.3 | 515.1 |
2
As of | |||||||||
February | November | ||||||||
2006 | 2005 | ||||||||
(in millions, except share | |||||||||
and per share amounts) | |||||||||
Assets
|
|||||||||
Cash and cash equivalents
|
$ | 6,571 | $ | 10,261 | |||||
Cash and securities segregated for
regulatory and other purposes
|
60,956 | 51,405 | |||||||
Receivables from brokers, dealers
and clearing organizations
|
14,971 | 15,150 | |||||||
Receivables from customers and
counterparties
|
68,644 | 60,231 | |||||||
Securities borrowed
|
200,017 | 191,800 | |||||||
Securities purchased under
agreements to resell
|
96,442 | 83,619 | |||||||
Financial instruments owned, at
fair value
|
249,807 | 238,043 | |||||||
Financial instruments owned and
pledged as collateral, at fair value
|
42,471 | 38,983 | |||||||
Total financial instruments owned,
at fair value
|
292,278 | 277,026 | |||||||
Other assets
|
18,942 | 17,312 | |||||||
Total assets
|
$ | 758,821 | $ | 706,804 | |||||
Liabilities and
shareholders equity
|
|||||||||
Secured short-term borrowings
|
$ | 8,482 | $ | 7,972 | |||||
Unsecured short-term borrowings
|
49,870 | 47,247 | |||||||
Total short-term borrowings,
including the current portion of long-term borrowings
|
58,352 | 55,219 | |||||||
Payables to brokers, dealers and
clearing organizations
|
7,435 | 10,014 | |||||||
Payables to customers and
counterparties
|
180,636 | 178,304 | |||||||
Securities loaned
|
22,902 | 23,331 | |||||||
Securities sold under agreements to
repurchase
|
167,226 | 149,026 | |||||||
Financial instruments sold, but not
yet purchased, at fair value
|
153,887 | 149,071 | |||||||
Other liabilities and accrued
expenses
|
24,817 | 13,830 | |||||||
Secured long-term borrowings
|
18,518 | 15,669 | |||||||
Unsecured long-term borrowings
|
96,133 | 84,338 | |||||||
Total long-term borrowings
|
114,651 | 100,007 | |||||||
Total liabilities
|
729,906 | 678,802 | |||||||
Commitments, contingencies and
guarantees
|
|||||||||
Shareholders
equity
|
|||||||||
Preferred stock, par value
$0.01 per share; 150,000,000 shares authorized,
70,000 shares issued and outstanding as of February 2006
with liquidation preference of $25,000 per share
|
1,750 | 1,750 | |||||||
Common stock, par value
$0.01 per share; 4,000,000,000 shares authorized,
587,186,019 and 573,970,935 shares issued as of February
2006 and November 2005, respectively, and 431,259,569 and
437,170,695 shares outstanding as of February 2006 and
November 2005, respectively
|
6 | 6 | |||||||
Restricted stock units and employee
stock options
|
3,305 | 3,415 | |||||||
Nonvoting common stock, par value
$0.01 per share; 200,000,000 shares authorized, no
shares issued and outstanding
|
| | |||||||
Additional paid-in capital
|
18,413 | 17,159 | |||||||
Retained earnings
|
21,416 | 19,085 | |||||||
Accumulated other comprehensive
income
|
15 | | |||||||
Common stock held in treasury, at
cost, par value $0.01 per share; 155,926,450 and
136,800,240 shares as of February 2006 and November 2005,
respectively
|
(15,990 | ) | (13,413 | ) | |||||
Total shareholders equity
|
28,915 | 28,002 | |||||||
Total liabilities and
shareholders equity
|
$ | 758,821 | $ | 706,804 | |||||
3
Period Ended | |||||||||
February | November | ||||||||
2006 | 2005 | ||||||||
(in millions, except | |||||||||
per share amounts) | |||||||||
Preferred stock
|
|||||||||
Balance, beginning of year
|
$ | 1,750 | $ | | |||||
Issued
|
| 1,750 | |||||||
Balance, end of period
|
1,750 | 1,750 | |||||||
Common stock, par value
$0.01 per share
|
|||||||||
Balance, beginning of year
|
6 | 6 | |||||||
Issued
|
| | |||||||
Balance, end of period
|
6 | 6 | |||||||
Restricted stock units and
employee stock options
|
|||||||||
Balance, beginning of year
|
3,415 | 2,013 | |||||||
Issued
|
670 | 1,871 | |||||||
Delivered
|
(697 | ) | (423 | ) | |||||
Forfeited
|
(82 | ) | (37 | ) | |||||
Options exercised
|
(1 | ) | (9 | ) | |||||
Balance, end of period
|
3,305 | 3,415 | |||||||
Additional paid-in
capital
|
|||||||||
Balance, beginning of year
|
17,159 | 15,501 | |||||||
Issuance of common stock
|
1,001 | 1,417 | |||||||
Preferred stock issuance costs
|
| (31 | ) | ||||||
Excess tax benefit related to
share-based compensation
|
253 | 272 | |||||||
Balance, end of period
|
18,413 | 17,159 | |||||||
Retained earnings
|
|||||||||
Balance, beginning of year
|
19,085 | 13,970 | |||||||
Net earnings
|
2,479 | 5,626 | |||||||
Dividends declared on common stock
|
(122 | ) | (494 | ) | |||||
Dividends declared on preferred
stock
|
(26 | ) | (17 | ) | |||||
Balance, end of period
|
21,416 | 19,085 | |||||||
Unearned compensation
|
|||||||||
Balance, beginning of year
|
| (117 | ) | ||||||
Amortization of restricted stock
units
|
| 117 | |||||||
Balance, end of period
|
| | |||||||
Accumulated other comprehensive
income
|
|||||||||
Balance, beginning of year
|
| 11 | |||||||
Currency translation adjustment,
net of tax
|
17 | (27 | ) | ||||||
Minimum pension liability
adjustment, net of tax
|
| (11 | ) | ||||||
Net gains on cash flow hedges, net
of tax
|
1 | 9 | |||||||
Net unrealized holding
(losses)/gains, net of tax
|
(3 | ) | 18 | ||||||
Balance, end of period
|
15 | | |||||||
Common stock held in treasury,
at cost
|
|||||||||
Balance, beginning of year
|
(13,413 | ) | (6,305 | ) | |||||
Repurchased
|
(2,577 | ) | (7,108 | ) | |||||
Balance, end of period
|
(15,990 | ) | (13,413 | ) | |||||
Total shareholders
equity
|
$ | 28,915 | $ | 28,002 | |||||
4
Three Months | |||||||||||
Ended February | |||||||||||
2006 | 2005 | ||||||||||
(in millions) | |||||||||||
Cash flows from operating
activities
|
|||||||||||
Net earnings
|
$ | 2,479 | $ | 1,512 | |||||||
Noncash items included in net
earnings
|
|||||||||||
Depreciation and amortization
|
175 | 161 | |||||||||
Amortization of identifiable
intangible assets
|
44 | 37 | |||||||||
Share-based compensation
|
333 | 219 | |||||||||
Changes in operating assets and
liabilities
|
|||||||||||
Cash and securities segregated for
regulatory and other purposes
|
(1,009 | ) | 3,012 | ||||||||
Net receivables from brokers,
dealers and clearing organizations
|
(2,400 | ) | 343 | ||||||||
Net payables to customers and
counterparties
|
(5,282 | ) | (4,739 | ) | |||||||
Securities borrowed, net of
securities loaned
|
(8,645 | ) | (25,763 | ) | |||||||
Securities sold under agreements to
repurchase, net of securities purchased under agreements to
resell
|
5,377 | 39,814 | |||||||||
Financial instruments owned, at
fair value
|
(14,878 | ) | (11,429 | ) | |||||||
Financial instruments sold, but not
yet purchased, at fair value
|
4,466 | (6,541 | ) | ||||||||
Other, net
|
(316 | ) | (2,336 | ) | |||||||
Net cash used for operating
activities
|
(19,656 | ) | (5,710 | ) | |||||||
Cash flows from investing
activities
|
|||||||||||
Purchase of property, leasehold
improvements and equipment
|
(674 | ) | (507 | ) | |||||||
Proceeds from sales of property,
leasehold improvements and equipment
|
24 | | |||||||||
Business acquisitions, net of cash
acquired
|
(270 | ) | (517 | ) | |||||||
Net cash used for investing
activities
|
(920 | ) | (1,024 | ) | |||||||
Cash flows from financing
activities
|
|||||||||||
Short-term borrowings, net
|
3,938 | (3,898 | ) | ||||||||
Issuance of long-term borrowings
|
18,239 | 18,821 | |||||||||
Repayment of long-term borrowings,
including the current portion of long-term borrowings
|
(4,011 | ) | (6,253 | ) | |||||||
Derivative contracts with a
financing element, net
|
620 | 174 | |||||||||
Common stock repurchased
|
(2,577 | ) | (1,225 | ) | |||||||
Dividends paid on common and
preferred stock
|
(148 | ) | (128 | ) | |||||||
Proceeds from issuance of common
stock
|
644 | 409 | |||||||||
Excess tax benefit related to
share-based compensation
|
181 | | |||||||||
Net cash provided by financing
activities
|
16,886 | 7,900 | |||||||||
Net (decrease)/increase in cash and
cash equivalents
|
(3,690 | ) | 1,166 | ||||||||
Cash and cash equivalents,
beginning of year
|
10,261 | 4,365 | |||||||||
Cash and cash equivalents, end of
period
|
$ | 6,571 | $ | 5,531 | |||||||
5
Three Months | ||||||||
Ended February | ||||||||
2006 | 2005 | |||||||
(in millions) | ||||||||
Net earnings
|
$ | 2,479 | $ | 1,512 | ||||
Currency translation adjustment,
net of tax
|
17 | | ||||||
Net gains on cash flow hedges, net
of tax
|
1 | | ||||||
Net unrealized holding losses, net
of tax
|
(3 | ) | | |||||
Comprehensive income
|
$ | 2,494 | $ | 1,512 | ||||
6
7
Note 1.
Description of Business
Investment Banking. The firm provides a broad range of
investment banking services to a diverse group of corporations,
financial institutions, governments and individuals.
Trading and Principal Investments. The firm facilitates
client transactions with a diverse group of corporations,
financial institutions, governments and individuals and takes
proprietary positions through market making in, trading of and
investing in fixed income and equity products, currencies,
commodities and derivatives on such products. In addition, the
firm engages in specialist and market-making activities on
equities and options exchanges and clears client transactions on
major stock, options and futures exchanges worldwide. In
connection with the firms merchant banking and other
investing activities, the firm makes 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 across all major asset classes to a
diverse group of institutions and individuals worldwide, and
provides prime brokerage services, financing services and
securities lending services to mutual funds, pension funds,
hedge funds, foundations and high-net-worth individuals
worldwide.
Note 2.
Significant Accounting Policies
Basis of Presentation
Voting Interest Entities. Voting interest entities are
entities in which (i) the total equity investment at risk
is sufficient to enable the entity to finance its activities
independently and (ii) the equity holders have the
obligation to absorb losses, the right to receive residual
returns and the right to make decisions about the entitys
activities. Voting interest entities
8
are consolidated in accordance with Accounting Research Bulletin
(ARB) No. 51, Consolidated Financial
Statements, as amended. ARB No. 51 states that
the usual condition for a controlling financial interest in an
entity is ownership of a majority voting interest. Accordingly,
the firm consolidates voting interest entities in which it has a
majority voting interest.
Variable Interest Entities. VIEs are entities that lack
one or more of the characteristics of a voting interest entity.
A controlling financial interest in a VIE is present when an
enterprise has a variable interest, or a combination of variable
interests, that will absorb a majority of the VIEs
expected losses, receive a majority of the VIEs expected
residual returns, or both. The enterprise with a controlling
financial interest, known as the primary beneficiary,
consolidates the VIE. In accordance with Financial Accounting
Standards Board (FASB) Interpretation (FIN) No. 46-R,
Consolidation of Variable Interest Entities, the
firm consolidates all VIEs of which it is the primary
beneficiary.
The firm determines whether it is the primary beneficiary of a
VIE by first performing a qualitative analysis of the VIE that
includes a review of, among other factors, its 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 firm
performs a quantitative analysis. For purposes of allocating a
VIEs expected losses and expected residual returns to its
variable interest holders, the firm utilizes the top
down method. Under that method, the firm calculates its
share of the VIEs expected losses and expected residual
returns using the specific cash flows that would be allocated to
it, based on contractual arrangements and/or the firms
position in the capital structure of the VIE, under various
probability-weighted scenarios.
QSPEs.
QSPEs are passive entities that are commonly used
in mortgage and other securitization transactions. Statement of
Financial Accounting Standards (SFAS) No. 140,
Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, sets forth the
criteria an entity must satisfy to be a QSPE. These criteria
include the types of assets a QSPE may hold, limits on asset
sales, the use of derivatives and financial guarantees, and the
level of discretion a servicer may exercise in attempting to
collect receivables. These criteria may require management to
make judgments about complex matters, including whether a
derivative is considered passive and the degree of discretion a
servicer may exercise. In accordance with SFAS No. 140
and FIN No. 46-R, the firm does not consolidate QSPEs.
Equity-Method Investments. When the firm does not have a
controlling financial interest in an entity but exerts
significant influence over the entitys operating and
financial policies (generally defined as owning a voting
interest of 20% to 50%) and has an investment in common stock or
in-substance common stock, the firm accounts for its investment
in accordance with the equity method of accounting prescribed by
Accounting Principles Board (APB) Opinion No. 18,
The Equity Method of Accounting for Investments in Common
Stock.
Other. If the firm does not consolidate an entity or
apply the equity method of accounting, the firm accounts for its
investment at fair value. The firm also has formed numerous
nonconsolidated investment funds with third-party investors that
are typically organized as limited partnerships. The firm acts
as general partner for these funds and does not hold a majority
of the economic interests in any fund. For funds established on
or before June 29, 2005 in which the firm holds more
than a minor interest and for funds established or modified
after June 29, 2005, the firm has provided the third-party
investors with rights to terminate the funds (see
Recent Accounting Developments below).
These fund
9
investments are included in Financial instruments owned,
at fair value in the condensed consolidated statements of
financial condition.
Revenue Recognition
Cash Trading Instruments. Fair values of the firms
cash trading instruments are generally obtained from quoted
market prices in active markets, broker or dealer price
quotations, or alternative pricing sources with reasonable
levels of price transparency. The types of instruments valued in
this manner include U.S. government 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.
10
Certain cash trading instruments trade infrequently and have
little or no price transparency. Such instruments may include
certain corporate bank loans, mortgage whole loans and
distressed debt. The firm values these instruments initially at
cost and generally does not adjust valuations unless there is
substantive evidence supporting a change in the value of the
underlying instrument or valuation assumptions (such as similar
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, the firm uses
valuation methodologies such as the present value of known or
estimated cash flows.
Cash trading instruments owned by the firm (long positions) are
marked to bid prices and instruments sold but not yet purchased
(short positions) are marked to offer prices. If liquidating a
position is expected to affect its prevailing market price, the
valuation is adjusted generally based on market evidence or
predetermined policies. In certain circumstances, such as for
highly illiquid positions, managements estimates are used
to determine this adjustment.
Derivative Contracts. Fair values of the firms
derivative contracts consist of exchange-traded and
over-the-counter (OTC)
derivatives and are reflected net of cash that the firm has paid
and received (for example, option premiums or cash paid or
received pursuant to credit support agreements). Fair values of
the firms exchange-traded derivatives are generally
determined from quoted market prices. OTC derivatives are valued
using valuation models. The firm uses a variety of valuation
models including the present value of known or estimated cash
flows and option-pricing models. The valuation models used to
derive the fair values of the firms OTC derivatives
require inputs including contractual terms, market prices, yield
curves, credit curves, measures of volatility, prepayment rates
and correlations of such inputs. The selection of a model to
value an OTC derivative depends upon the contractual terms of,
and specific risks inherent in, the instrument as well as the
availability of pricing information in the market. The firm
generally uses similar models to value similar instruments.
Where possible, the firm verifies the values produced by its
pricing models to market transactions. For OTC derivatives that
trade in liquid markets, such as generic forwards, swaps and
options, model selection does not involve significant judgment
because market prices are readily available. For OTC derivatives
that trade in less liquid markets, model selection requires more
judgment because such instruments tend to be more complex and
pricing information is less available in these markets. Price
transparency is inherently more limited for more complex
structures because they often combine one or more product types,
requiring additional inputs such as correlations and
volatilities. As markets continue to develop and more pricing
information becomes available, the firm continues to review and
refine the models it uses.
At the inception of an OTC derivative contract (day one), the
firm values the contract at the model value if the firm can
verify all of the significant model inputs to observable market
data and verify the model to market transactions. When
appropriate, valuations are adjusted to reflect various factors
such as liquidity, bid/offer spreads and credit considerations.
These adjustments are generally based on market evidence or
predetermined policies. In certain circumstances, such as for
highly illiquid positions, managements estimates are used
to determine these adjustments.
Where the firm cannot verify all of the significant model inputs
to observable market data and verify the model to market
transactions, the firm values the contract at the transaction
price at inception and, consequently, records no day one gain or
loss in accordance with
11
Emerging Issues Task Force (EITF) Issue No. 02-3,
Issues Involved in Accounting for Derivative Contracts
Held for Trading Purposes and Contracts Involved in Energy
Trading and Risk Management Activities. Following day one, the firm adjusts the inputs to its valuation
models only to the extent that changes in these inputs can be
verified by similar market transactions, third-party pricing
services and/or broker quotes, or can be derived from other
substantive evidence such as empirical market data. In
circumstances where the firm cannot verify the model to market
transactions, it is possible that a different valuation model
could produce a materially different estimate of fair value.
Principal Investments. In valuing corporate and real
estate principal investments, the firms portfolio is
separated into investments in private companies, investments in
public companies (excluding the firms investment in the
convertible preferred stock of Sumitomo Mitsui Financial Group,
Inc. (SMFG)) and the firms investment in SMFG.
The firms private principal investments, by their nature,
have little or no price transparency. Such investments are
initially carried at cost as an approximation of fair value.
Adjustments to carrying value are made if there are third-party
transactions evidencing a change in value. Downward adjustments
are also made, in the absence of third-party transactions, if it
is determined that the expected realizable value of the
investment is less than the carrying value. In reaching that
determination, many factors are considered including, but not
limited to, the operating cash flows and financial performance
of the companies or properties relative to budgets or
projections, trends within sectors and/or regions, underlying
business models, expected exit timing and strategy, and any
specific rights or terms associated with the investment, such as
conversion features and liquidation preferences.
The firms public principal investments, which tend to be
large, concentrated holdings that result from initial public
offerings or other corporate transactions, are valued using
quoted market prices discounted based on predetermined written
policies for nontransferability and illiquidity.
The firms investment in the convertible preferred stock of
SMFG is carried at fair value, which is derived from a model
that incorporates SMFGs common stock price and credit
spreads, the impact of nontransferability and illiquidity, and
the downside protection on the conversion strike price. The
firms investment in the convertible preferred stock of
SMFG is generally nontransferable, but is freely convertible
into SMFG common stock. Restrictions on the firms ability
to hedge or sell two-thirds of the common stock underlying its
investment in SMFG lapsed in equal installments on
February 7, 2005 and March 9, 2006. As of the date of
this filing, the firm was fully hedged with respect to the first
one-third installment of the unrestricted shares and partially
hedged with respect to the second one-third installment of the
unrestricted shares. Restrictions on the firms ability to
hedge or sell the remaining one-third installment lapse on
February 7, 2007. Effective March 1, 2006, the
conversion price of the firms SMFG preferred stock into
shares of SMFG common stock is ¥320,700. This price is
subject to downward adjustment if the price of SMFG common stock
at the time of conversion is less than the conversion price
(subject to a floor of ¥105,700).
Resale and Repurchase Agreements. Securities purchased
under agreements to resell and securities sold under agreements
to repurchase, principally U.S. government, federal agency
and investment-grade foreign sovereign obligations, represent
short-term collateralized financing transactions and are carried
in the condensed consolidated statements of financial condition
at their contractual amounts plus accrued interest. These
amounts are presented on a net-by-counterparty basis when the
requirements of FIN No. 41, Offsetting of
Amounts Related to Certain Repurchase and Reverse Repurchase
Agreements, or FIN No. 39, Offsetting of
Amounts Related to Certain Contracts, are satisfied. The
firm receives securities purchased under agreements to resell,
makes delivery of securities sold under agreements to
repurchase, monitors the market value of these securities on a
daily basis and delivers or obtains additional collateral as
appropriate.
Securities Borrowed and Loaned. Securities borrowed and
loaned are recorded based on the amount of cash collateral
advanced or received. These transactions 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
loaned, and delivers or obtains additional collateral as
appropriate.
Three Months | ||||||||
Ended February | ||||||||
2006 | 2005 | |||||||
(in millions) | ||||||||
Revenues
(1)
|
$ | 112 | $ | 130 | ||||
Cost of power generation
|
98 | 110 |
|
(1) | Excludes revenues from nonconsolidated power generation facilities, accounted for in accordance with the equity method of accounting, as well as revenues associated with the firms power trading activities. |
12
13
Share-Based Compensation
Three Months Ended | |||||
February 2005 | |||||
(in
millions, except per share amounts) |
|||||
Net earnings applicable to common
shareholders, as reported
|
$ | 1,512 | |||
Add: Share-based
compensation expense, net of related tax effects, included in
reported net earnings
|
141 | ||||
Deduct: Share-based compensation
expense, net of related tax effects, determined under the fair
value method for all awards
|
(153 | ) | |||
Pro forma net earnings applicable
to common shareholders
|
$ | 1,500 | |||
Earnings per common share, as
reported
|
|||||
Basic
|
$ | 3.06 | |||
Diluted
|
2.94 | ||||
Pro forma earnings per common share
|
|||||
Basic
|
$ | 3.03 | |||
Diluted
|
2.91 |
14
15
Goodwill
Identifiable Intangible Assets
Property, Leasehold Improvements and Equipment
16
Foreign Currency Translation
Income Taxes
Earnings Per Common Share
Cash and Cash Equivalents
17
Recent Accounting Developments
Note 3.
Financial Instruments
Fair Value of Financial Instruments
As of | |||||||||||||||||
February 2006 | November 2005 | ||||||||||||||||
Assets | Liabilities | Assets | Liabilities | ||||||||||||||
(in millions) | |||||||||||||||||
Commercial paper, certificates of
deposit, time deposits and other money market instruments
|
$ | 14,672 | (1) | $ | | $ | 14,609 | (1) | $ | | |||||||
U.S. government, federal
agency and sovereign obligations
|
61,915 | 59,090 | 68,688 | 51,458 | |||||||||||||
Corporate and other debt
obligations
|
|||||||||||||||||
Mortgage whole loans and collateralized debt
obligations
|
38,697 | 306 | 31,459 | 223 | |||||||||||||
Investment-grade corporate bonds
|
14,017 | 4,289 | 12,415 | 4,232 | |||||||||||||
Bank loans
|
17,215 | 996 | 13,843 | 288 | |||||||||||||
High-yield securities
|
10,208 | 2,194 | 8,822 | 2,072 | |||||||||||||
Preferred stock
|
7,811 | 116 | 7,315 | 71 | |||||||||||||
Other
|
973 | 515 | 877 | 278 | |||||||||||||
88,921 | 8,416 | 74,731 | 7,164 | ||||||||||||||
Equities and convertible debentures
|
65,085 | 30,690 | 56,656 | 32,565 | |||||||||||||
State, municipal and provincial
obligations
|
3,120 | | 2,524 | | |||||||||||||
Derivative contracts
|
56,907 | (2) | 55,259 | (3) | 58,532 | (2) | 57,829 | (3) | |||||||||
Physical commodities
|
1,658 | 432 | 1,286 | 55 | |||||||||||||
Total
|
$ | 292,278 | (4) | $ | 153,887 | $ | 277,026 | $ | 149,071 | ||||||||
|
(1) | Includes $8.12 billion and $6.12 billion, as of February 2006 and November 2005, respectively, of money market instruments held by William Street Funding Corporation to support the William Street credit extension program. | |
(2) | Net of cash received pursuant to credit support agreements of $23.69 billion and $22.61 billion as of February 2006 and November 2005, respectively. | |
(3) | Net of cash paid pursuant to credit support agreements of $17.86 billion and $16.10 billion as of February 2006 and November 2005, respectively. | |
(4) | Includes approximately $1.40 billion of U.S. government, federal agency and other debt instruments, which are held by the firms insurance subsidiaries and accounted for as available-for-sale securities under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. |
Derivative Activities |
18
As of | ||||||||||||||||
February 2006 | November 2005 | |||||||||||||||
Assets | Liabilities | Assets | Liabilities | |||||||||||||
(in millions) | ||||||||||||||||
Forward settlement contracts
|
$ | 11,048 | $ | 12,382 | $ | 13,921 | $ | 15,345 | ||||||||
Swap agreements
|
25,789 | 20,761 | 25,865 | 22,001 | ||||||||||||
Option contracts
|
20,070 | 22,116 | 18,746 | 20,483 | ||||||||||||
Total
|
$ | 56,907 | $ | 55,259 | $ | 58,532 | $ | 57,829 | ||||||||
Securitization Activities |
19
As of February 2006 | As of November 2005 | ||||||||||||||||
Type of Retained Interests | Type of Retained Interests | ||||||||||||||||
Mortgage- | Corporate Debt | Mortgage- | Corporate Debt | ||||||||||||||
Backed | and Other (3) | Backed | and Other (3) | ||||||||||||||
($ in millions) | |||||||||||||||||
Fair value of retained interests
|
$ | 2,357 | $ | 1,482 | $ | 2,928 | $ | 1,799 | |||||||||
Weighted average life (years)
|
6.2 | 3.7 | 5.7 | 5.1 | |||||||||||||
Annual constant prepayment rate
|
23.7 | % | N/A | 18.6 | % | N/A | |||||||||||
Impact of 10% adverse change
|
$ | (30 | ) | $ | | $ | (44 | ) | $ | | |||||||
Impact of 20% adverse change
|
(49 | ) | | (73 | ) | | |||||||||||
Annual credit losses
(1)
|
3.0 | % | 2.8 | % | 5.0 | % | 2.5 | % | |||||||||
Impact of 10% adverse change
(2)
|
$ | (44 | ) | $ | (3 | ) | $ | (25 | ) | $ | (4 | ) | |||||
Impact of 20% adverse change
(2)
|
(81 | ) | (5 | ) | (48 | ) | (9 | ) | |||||||||
Annual discount rate
|
8.8 | % | 5.8 | % | 7.4 | % | 6.5 | % | |||||||||
Impact of 10% adverse change
|
$ | (76 | ) | $ | (11 | ) | $ | (70 | ) | $ | (13 | ) | |||||
Impact of 20% adverse change
|
(146 | ) | (25 | ) | (136 | ) | (29 | ) |
(1) | Annual percentage credit loss is based only on positions in which expected credit loss is a key assumption in the determination of fair values. | |
(2) | The impacts of adverse change take into account credit mitigants incorporated in the retained interests, including over-collateralization and subordination provisions. | |
(3) | Includes retained interests in bonds and other types of financial assets that are not subject to prepayment risk. |
20
Variable Interest Entities (VIEs)
As of | ||||||||
February | November | |||||||
2006 | 2005 | |||||||
(in millions) | ||||||||
Consolidated VIE assets
(1)
|
$ | 7,155 | $ | 6,624 | ||||
Maximum exposure to loss
|
4,469 | 3,944 |
|
(1) | Consolidated VIE assets include assets financed by nonrecourse short-term and long-term debt. Nonrecourse debt is debt that only the issuing subsidiary or, if applicable, a subsidiary guaranteeing the debt is obligated to repay. |
21
22
As of February 2006
Maximum Exposure to Loss in Nonconsolidated VIEs
Purchased
and
Commitments
VIE
Retained
and
Loans and
Assets
Interests
Guarantees
Derivatives
Investments
Total
(in millions)
$
21,985
$
544
$
$
2,312
$
$
2,856
2,879
1,797
1,797
5,024
2
92
1,008
1,102
14,041
12
1,216
1,228
6,489
189
190
55
526
960
$
50,418
$
735
$
294
$
4,164
$
2,750
$
7,943
As of November 2005
Maximum Exposure to Loss in Nonconsolidated VIEs
Purchased
and
Commitments
VIE
Retained
and
Loans and
Assets
Interests
Guarantees
Derivatives
Investments
Total
(in millions)
$
19,437
$
780
$
$
2,074
$
$
2,854
2,568
1,527
1,527
6,667
2
95
1,070
1,167
14,232
11
1,082
1,093
6,378
208
248
52
426
934
$
49,282
$
990
$
354
$
3,653
$
2,578
$
7,575
Secured Borrowing and Lending Activities
23
Note 4.
Short-Term Borrowings
As of | ||||||||
February | November | |||||||
2006 | 2005 | |||||||
(in millions) | ||||||||
Promissory notes
|
$ | 18,996 | $ | 17,339 | ||||
Commercial paper
|
5,533 | 5,154 | ||||||
Secured debt, bank loans and other
|
16,352 | 15,975 | ||||||
Current portion of secured and
unsecured long-term borrowings
|
17,471 | 16,751 | ||||||
Total
(1)(2)
|
$ | 58,352 | $ | 55,219 | ||||
(1) | As of February 2006 and November 2005, the weighted average interest rates for short-term borrowings, including commercial paper, were 4.37% and 3.98%, respectively. The weighted average interest rates, after giving effect to hedging activities, were 4.33% and 3.86% as of February 2006 and November 2005, respectively. | |
(2) | Short-term borrowings as of February 2006 include $325 million of hybrid financial instruments accounted for at fair value under SFAS No. 155. |
Note 5. | Long-Term Borrowings |
As of | |||||||||
February | November | ||||||||
2006 | 2005 | ||||||||
(in millions) | |||||||||
Fixed rate obligations
(1)
|
|||||||||
U.S. dollar
|
$ | 38,442 | $ | 35,530 | |||||
Non-U.S. dollar
|
17,271 | 16,224 | |||||||
Floating rate obligations
(2)
|
|||||||||
U.S. dollar
|
38,471 | 31,952 | |||||||
Non-U.S. dollar
|
20,467 | 16,301 | |||||||
Total
(3)
|
$ | 114,651 | $ | 100,007 | |||||
(1) | As of both February 2006 and November 2005, interest rates on U.S. dollar fixed rate obligations ranged from 3.72% to 12.00%. As of February 2006 and November 2005, interest rates on non-U.S. dollar fixed rate obligations ranged from 0.50% to 8.88% and from 0.65% to 8.88%, respectively. | |
(2) | Floating interest rates generally are based on LIBOR or the federal funds rate. Certain equity-linked and indexed instruments are included in floating rate obligations. | |
(3) | Long-term borrowings as of February 2006 include $835 million of hybrid financial instruments accounted for at fair value under SFAS No. 155. |
24
As of | ||||||||
February | November | |||||||
2006 | 2005 | |||||||
(in millions) | ||||||||
William Street Funding Corporation
|
$ | 7,115 | $ | 5,107 | ||||
Variable interest entities
|
6,688 | 5,568 | ||||||
Other subsidiaries
|
2,533 | 2,951 | ||||||
Total (1)
|
$ | 16,336 | $ | 13,626 | ||||
(1) | Includes $1.05 billion and $1.33 billion of nonrecourse debt related to the firms consolidated power generation facilities as of February 2006 and November 2005, respectively. |
As of | ||||||||||||||||||||||||
February 2006 (1) (2) | November 2005 (1) (2) | |||||||||||||||||||||||
U.S. | Non-U.S. | U.S. | Non-U.S. | |||||||||||||||||||||
Dollar | Dollar | Total | Dollar | Dollar | Total | |||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
2007
|
$ | 12,148 | $ | 521 | $ | 12,669 | $ | 13,662 | $ | 861 | $ | 14,523 | ||||||||||||
2008
|
9,381 | 2,870 | 12,251 | 6,218 | 2,872 | 9,090 | ||||||||||||||||||
2009
|
11,510 | 3,160 | 14,670 | 9,241 | 3,094 | 12,335 | ||||||||||||||||||
2010
|
6,276 | 8,364 | 14,640 | 6,411 | 7,698 | 14,109 | ||||||||||||||||||
2011
|
5,659 | 2,166 | 7,825 | 4,840 | 1,430 | 6,270 | ||||||||||||||||||
2012-thereafter
|
31,939 | 20,657 | 52,596 | 27,110 | 16,570 | 43,680 | ||||||||||||||||||
Total
|
$ | 76,913 | $ | 37,738 | $ | 114,651 | $ | 67,482 | $ | 32,525 | $ | 100,007 | ||||||||||||
(1) | Long-term borrowings maturing within one year of the financial statement date and certain long-term borrowings that are redeemable within one year of the financial statement date at the option of the holder are included as short-term borrowings in the condensed consolidated statements of financial condition. |
(2) | Long-term borrowings that are repayable prior to maturity at the option of the firm are reflected at their contractual maturity dates. Long-term borrowings that are redeemable prior to maturity at the option of the holder are reflected at the dates such options become exercisable. |
25
As of | ||||||||||||||||
February | November | |||||||||||||||
2006 | 2005 | |||||||||||||||
Amount | Rate | Amount | Rate | |||||||||||||
($ in millions) | ||||||||||||||||
Fixed rate obligations
|
$ | 2,842 | 5.93 | % | $ | 3,468 | 5.48 | % | ||||||||
Floating rate obligations
|
111,809 | 4.78 | 96,539 | 4.31 | ||||||||||||
Total
|
$ | 114,651 | 4.81 | $ | 100,007 | 4.35 | ||||||||||
Deferrable Interest Junior Subordinated Debentures |
Note 6. | Commitments, Contingencies and Guarantees |
Commitments |
26
As of | |||||||||
February | November | ||||||||
2006 | 2005 | ||||||||
William Street program
|
$ | 14,943 | $ | 14,505 | |||||
Other commercial lending commitments
|
|||||||||
Investment-grade
|
11,894 | 17,592 | |||||||
Non-investment-grade
|
15,650 | 18,536 | |||||||
Warehouse financing
|
15,934 | 10,489 | |||||||
Total commitments to extend credit
|
$ | 58,421 | $ | 61,122 | |||||
| William Street program. Substantially all of the commitments provided under the William Street credit extension program are to investment-grade corporate borrowers. Commitments under the William Street credit extension program are issued by William Street Commitment Corporation (Commitment Corp.), a consolidated wholly owned subsidiary of Group Inc. whose assets and liabilities are legally separated from other assets and liabilities of the firm, and also by other subsidiaries of Group Inc. William Street Funding Corporation (Funding Corp.), another consolidated wholly owned subsidiary of Group Inc. whose assets and liabilities are legally separated from other assets and liabilities of the firm, was formed to raise funding to support the William Street credit extension program. The assets of Commitment Corp. and of Funding Corp. will not be available to their respective shareholders until the claims of their respective creditors have been paid. In addition, no affiliate of either Commitment Corp. or Funding Corp., except in limited cases as expressly agreed in writing, is responsible for any obligation of either entity. With respect to these commitments, the firm has credit loss protection provided to it by SMFG, which is generally limited to 95% of the first loss the firm realizes on approved loan commitments, subject to a maximum of $1.00 billion. In addition, subject to the satisfaction of certain conditions, upon the firms request, SMFG will provide protection for 70% of the second loss on such commitments, subject to a maximum of $1.13 billion. The firm also uses other financial instruments to hedge certain William Street commitments not covered by SMFG. |
27
28
Other commercial lending commitments.
In addition to the
commitments issued under the William Street credit extension
program, the firm extends other credit commitments, primarily in
connection with contingent acquisition financing and other types
of corporate lending. As part of its ongoing credit origination
activities, the firm may reduce its credit risk on commitments
by syndicating all or substantial portions to other investors.
Additionally, commitments that are extended for contingent
acquisition financing are often short-term in nature, as
borrowers often replace them with other funding sources.
Warehouse financing.
The firm provides financing for the
warehousing of financial assets to be securitized, primarily in
connection with CDOs and mortgage securitizations. These
financings are expected to be repaid from the proceeds of the
related securitizations, for which the firm may or may not act
as underwriter. These arrangements are secured by the warehoused
assets, primarily consisting of mortgage-backed and other
asset-backed securities, residential and commercial mortgages
and corporate debt instruments.
(in millions) | |||||
Minimum rental payments
|
|||||
Remainder of 2006
|
$ | 302 | |||
2007
|
553 | ||||
2008
|
354 | ||||
2009
|
354 | ||||
2010
|
267 | ||||
2011-thereafter
|
2,199 | ||||
Total
|
$ | 4,029 | |||
Contingencies |
29
30
31
As of February 2006
Maximum Payout/Notional Amount by Period of Expiration (4)
Carrying
Remainder
2007-
2009-
2011-
Value
of 2006
2008
2010
Thereafter
Total
(in millions)
$
5,826
$
310,519
$
296,942
$
267,052
$
397,243
$
1,271,756
15,659
15,659
87
349
349
6,851
7,636
4
141
1
20
166
34
24
5
57
120
6
429
144
9
91
673
As of November 2005
Maximum Payout/Notional Amount by Period of Expiration (4)
Carrying
2007-
2009-
2011-
Value
2006
2008
2010
Thereafter
Total
(in millions)
$
8,217
$
356,131
$
244,163
$
259,332
$
289,459
$
1,149,085
16,324
16,324
174
349
349
6,851
7,723
147
2
95
20
264
15
23
6
56
100
4
354
119
129
101
703
(1)
The carrying value excludes the effect of a legal right of
setoff that may exist under an enforceable netting agreement.
(2)
Collateral held by the lenders in connection with securities
lending indemnifications was $16.26 billion and
$16.89 billion as of February 2006 and November 2005,
respectively.
(3)
Includes the guarantee of all payments scheduled to be made over
the life of the Trust, which could be shortened in the event the
firm redeemed the junior subordinated debentures issued to fund
the Trust. (See Note 5 for further information regarding
the Trust.)
(4)
Such amounts do not represent the anticipated losses in
connection with these contracts.
32
Note 7.
Shareholders Equity
Shares | Shares | Earliest | Redemption Value | |||||||||||||||||
Series | Description | Issued | Authorized | Redemption Date | (in millions) | |||||||||||||||
A | Perpetual Floating Rate | 30,000 | 50,000 | April 25, 2010 | $ | 750 | ||||||||||||||
Non-Cumulative | ||||||||||||||||||||
B | Perpetual 6.20% | 32,000 | 50,000 | October 31, 2010 | 800 | |||||||||||||||
Non-Cumulative | ||||||||||||||||||||
C | Perpetual Floating Rate | 8,000 | 25,000 | October 31, 2010 | 200 | |||||||||||||||
Non-Cumulative | ||||||||||||||||||||
70,000 | 125,000 | $ | 1,750 | |||||||||||||||||
As of | ||||||||
February | November | |||||||
2006 | 2005 | |||||||
(in millions) | ||||||||
Currency translation adjustment,
net of tax
|
$ | 1 | $ | (16 | ) | |||
Minimum pension liability
adjustment, net of tax
|
(11 | ) | (11 | ) | ||||
Net gains on cash flow hedges, net
of tax
|
10 | 9 | ||||||
Net unrealized holding gains, net
of tax
|
15 | (1) | 18 | |||||
Total accumulated other
comprehensive income, net of tax
|
$ | 15 | $ | | ||||
(1) | Consists of net unrealized losses of $2 million on available-for-sale securities held by the firms insurance subsidiaries and net unrealized gains of $17 million on available-for-sale securities held by investees accounted for under the equity method. |
33
Three Months | |||||||||
Ended February | |||||||||
2006 | 2005 | ||||||||
(in millions, except | |||||||||
per share amounts) | |||||||||
Numerator for basic and diluted
EPS net earnings applicable to common shareholders
|
$ | 2,453 | $ | 1,512 | |||||
Denominator for basic
EPS weighted average number of common shares
|
457.3 | 494.3 | |||||||
Effect of dilutive securities
|
|||||||||
Restricted stock units
|
10.9 | 7.8 | |||||||
Stock options
|
15.1 | 13.0 | |||||||
Dilutive potential common shares
|
26.0 | 20.8 | |||||||
Denominator for diluted
EPS weighted average number of common shares and
dilutive potential common shares
(1)
|
483.3 | 515.1 | |||||||
Basic EPS
|
$ | 5.36 | $ | 3.06 | |||||
Diluted EPS
|
5.08 | 2.94 |
(1) | The diluted EPS computations do not include the antidilutive effect of the following options: |
Three Months | ||||||||
Ended February | ||||||||
2006 | 2005 | |||||||
(in millions) | ||||||||
Number of antidilutive options, end
of period
|
| 1 | ||||||
Note 9. | Goodwill and Identifiable Intangible Assets |
Goodwill |
34
Identifiable Intangible Assets
As of | ||||||||||
February | November | |||||||||
2006 | 2005 | |||||||||
(in millions) | ||||||||||
Customer
lists (1)
|
Gross carrying amount | $ | 1,021 | $ | 1,021 | |||||
Accumulated amortization | (257 | ) | (244 | ) | ||||||
Net carrying amount | $ | 764 | $ | 777 | ||||||
Power
contracts (2)
|
Gross carrying amount | $ | 739 | $ | 497 | |||||
Accumulated amortization | (20 | ) | (16 | ) | ||||||
Net carrying amount | $ | 719 | $ | 481 | ||||||
New York Stock
|
Gross carrying amount | $ | 714 | $ | 714 | |||||
Exchange (NYSE)
|
Accumulated amortization | (142 | ) | (134 | ) | |||||
specialist rights
|
Net carrying amount | $ | 572 | $ | 580 | |||||
Value of business
|
Gross carrying amount | $ | 279 | $ | | |||||
acquired
(VOBA) (3)
|
Accumulated amortization | | | |||||||
Net carrying amount | $ | 279 | $ | | ||||||
Exchange-traded
|
Gross carrying amount | $ | 138 | $ | 138 | |||||
fund (ETF)
|
Accumulated amortization | (29 | ) | (27 | ) | |||||
specialist rights
|
Net carrying amount | $ | 109 | $ | 111 | |||||
Other (4)
|
Gross carrying amount | $ | 314 | $ | 312 | |||||
Accumulated amortization | (214 | ) | (206 | ) | ||||||
Net carrying amount | $ | 100 | $ | 106 | ||||||
Total
|
Gross carrying amount | $ | 3,205 | $ | 2,682 | |||||
Accumulated amortization | (662 | ) | (627 | ) | ||||||
Net carrying amount | $ | 2,543 | $ | 2,055 | ||||||
(1) | Primarily includes the firms clearance and execution and NASDAQ customer lists related to SLK LLC (SLK) and financial counseling customer lists related to The Ayco Company, L.P. | |
(2) | Primarily relates to above-market power contracts of consolidated power generation facilities related to Cogentrix Energy, Inc. and National Energy & Gas Transmission, Inc. (NEGT). Substantially all of these power contracts have been pledged as collateral to counterparties in connection with certain of the firms secured short-term and long-term borrowings. The weighted average remaining life of these power contracts is approximately 11 years. | |
(3) | Represents the present value of estimated future gross profits of the variable annuity and variable life insurance business acquired in fiscal 2006. VOBA is amortized over the estimated life of the underlying contracts based on estimated gross profits, and amortization is adjusted based on actual experience. The weighted average remaining amortization period for VOBA is seven years as of the end of the first quarter. | |
(4) | Primarily includes technology-related and other assets related to SLK. |
35
(in millions) | ||||
Remainder of 2006
|
$ | 208 | ||
2007
|
228 | |||
2008
|
201 | |||
2009
|
193 | |||
2010
|
187 | |||
2011
|
182 |
Note 10. | Other Assets and Other Liabilities |
Other Assets |
As of | ||||||||
February | November | |||||||
2006 | 2005 | |||||||
(in millions) | ||||||||
Goodwill and identifiable
intangible assets
(1)
|
$ | 5,667 | $ | 5,203 | ||||
Property, leasehold improvements
and equipment
(2)
|
5,505 | 5,097 | ||||||
Equity-method investments and joint
ventures
|
2,393 | 2,965 | ||||||
Income tax-related assets
|
1,403 | 1,304 | ||||||
Miscellaneous receivables and other
|
3,974 | 2,743 | ||||||
Total
|
$ | 18,942 | $ | 17,312 | ||||
(1) | See Note 9 for further information regarding the firms goodwill and identifiable intangible assets. | |
(2) | Net of accumulated depreciation and amortization of $4.80 billion and $4.62 billion for February 2006 and November 2005, respectively. |
36
Other Liabilities
As of | ||||||||
February | November | |||||||
2006 | 2005 | |||||||
(in millions) | ||||||||
Separate account liabilities
(1)
|
$ | 8,595 | $ | | ||||
Compensation and benefits
|
5,325 | 6,598 | ||||||
Minority interest
|
3,507 | 3,164 | ||||||
Other insurance-related liabilities
(2)
|
2,428 | | ||||||
Accrued expenses and other payables
|
4,962 | 4,068 | ||||||
Total
|
$ | 24,817 | $ | 13,830 | ||||
(1) | Offsetting separate account assets, representing segregated contract holder funds under variable annuity and variable life insurance contracts, are included in Cash and securities segregated for regulatory and other purposes in the condensed consolidated statements of financial condition. | |
(2) | Consists of $2.12 billion of contract holder account balances and liabilities for future benefits and $310 million in reserves for guaranteed minimum death and income benefits on variable annuity contracts. Such reserves represent estimates, under multiple scenarios, of future guaranteed benefits expected to be paid less future fees expected to be earned. Related to the $2.12 billion is a receivable of $805 million for risks ceded to reinsurers included in Receivables from customers and counterparties in the condensed consolidated statements of financial condition. Reinsurance contracts do not relieve the firm from its obligations to contract holders. |
Note 11. | Employee Benefit Plans |
Defined Benefit Pension Plans and Postretirement Plans |
37
Three Months | |||||||||
Ended February | |||||||||
2006 | 2005 | ||||||||
(in millions) | |||||||||
U.S. pension
|
|||||||||
Service cost
|
$ | | $ | | |||||
Interest cost
|
5 | 5 | |||||||
Expected return on plan assets
|
(7 | ) | (7 | ) | |||||
Net amortization
|
2 | 2 | |||||||
Total
|
$ | | $ | | |||||
Non-U.S. pension
|
|||||||||
Service cost
|
$ | 14 | $ | 11 | |||||
Interest cost
|
6 | 5 | |||||||
Expected return on plan assets
|
(7 | ) | (6 | ) | |||||
Net amortization
|
3 | 3 | |||||||
Other
(1)
|
| (17 | ) | ||||||
Total
|
$ | 16 | $ | (4 | ) | ||||
Postretirement
|
|||||||||
Service cost
|
$ | 4 | $ | 3 | |||||
Interest cost
|
5 | 3 | |||||||
Net amortization
|
5 | 1 | |||||||
Total
|
$ | 14 | $ | 7 | |||||
(1) | Represents a benefit as a result of the termination of a Japanese pension plan. |
Note 12. | Employee Incentive Plans |
Stock Incentive Plan |
38
Restricted Stock Units
Weighted Average | |||||||||||||||||
Grant-Date Fair | |||||||||||||||||
Restricted Stock Units | Value of Restricted | ||||||||||||||||
Outstanding | Stock Units Outstanding | ||||||||||||||||
Future | No Future | Future | No Future | ||||||||||||||
Service | Service | Service | Service | ||||||||||||||
Required | Required | Required | Required | ||||||||||||||
Outstanding, November 2005
(1)
|
30,117,820 | 24,993,866 | $ | 112.01 | $ | 107.18 | |||||||||||
Granted
(2) (3)
|
283,068 | 137,973 | 133.25 | 137.88 | |||||||||||||
Forfeited
|
(63,442 | ) | (158,429 | ) | 103.05 | 98.07 | |||||||||||
Delivered
|
| (7,661,278 | ) | | 90.80 | ||||||||||||
Vested
(3)
|
(1,051,747 | ) | 1,051,747 | 106.11 | 106.11 | ||||||||||||
Outstanding, February 2006
|
29,285,699 | 18,363,879 | $ | 112.44 | $ | 114.35 | |||||||||||
(1) | Includes restricted stock units granted to employees in the three month period ended February 2006 as part of compensation for fiscal 2005. | |
(2) | The weighted average grant-date fair value of restricted stock units granted for the three months ended February 2006 was $134.76 per unit, compared with $109.28 per unit for the same prior year period. | |
(3) | The aggregate fair value of awards vested during the period was $155 million. |
Stock Options |
39
Weighted | |||||||||||||||||
Weighted | Aggregate | Average | |||||||||||||||
Options | Average | Intrinsic Value | Remaining Life | ||||||||||||||
Outstanding | Exercise Price | (in millions) | (in years) | ||||||||||||||
Outstanding, November 2005
(1)
|
64,237,687 | $ | 83.24 | ||||||||||||||
Granted
|
| | |||||||||||||||
Exercised
|
(8,136,558 | ) | 77.43 | ||||||||||||||
Forfeited
|
(164,258 | ) | 95.95 | ||||||||||||||
Outstanding, February 2006
|
55,936,871 | $ | 84.05 | $ | 3,362 | 5.6 | |||||||||||
Exercisable, February 2006
|
51,757,594 | 80.78 | 3,280 | 5.3 |
(1) | Includes stock options granted to employees in the three month period ended February 2006 as part of compensation for fiscal 2005. |
Three Months | ||||||||
Ended February | ||||||||
2006 | 2005 | |||||||
(in millions) | ||||||||
Noncash employee share-based
compensation
|
$ | 333 | $ | 219 | ||||
Cash settled equity
|
13 | | ||||||
Total employee share-based
compensation
|
346 | 219 | ||||||
Excess tax benefit related to
options exercised
|
156 | 90 | ||||||
Excess tax benefit related to
share-based compensation
(1)
|
253 | 92 |
(1) | Represents the tax benefit, recognized in additional paid-in capital, on stock options exercised and the delivery of shares underlying vested restricted stock units. |
40
41
Note 13.
Affiliated Funds
Note 14.
Regulation
42
Note 15.
Business Segments
Basis of Presentation
Segment Operating Results
As of or for the | ||||||||||
Three Months | ||||||||||
Ended February | ||||||||||
2006 | 2005 | |||||||||
(in millions) | ||||||||||
Investment
|
Net revenues | $ | 1,471 | $ | 893 | |||||
Banking
|
Operating expenses | 1,189 | 787 | |||||||
Pre-tax earnings | $ | 282 | $ | 106 | ||||||
Segment assets | $ | 4,717 | $ | 3,051 | ||||||
Trading and Principal
|
Net revenues | $ | 6,884 | $ | 4,383 | |||||
Investments
|
Operating expenses | 4,329 | 2,729 | |||||||
Pre-tax earnings | $ | 2,555 | $ | 1,654 | ||||||
Segment assets | $ | 548,746 | $ | 413,570 | ||||||
Asset Management and
|
Net revenues | $ | 1,980 | $ | 1,129 | |||||
Securities Services
|
Operating expenses | 1,099 | 713 | |||||||
Pre-tax earnings | $ | 881 | $ | 416 | ||||||
Segment assets | $ | 205,358 | $ | 179,276 | ||||||
Total
|
Net revenues (1) | $ | 10,335 | $ | 6,405 | |||||
Operating expenses (2) | 6,646 | 4,260 | ||||||||
Pre-tax earnings (3) | $ | 3,689 | $ | 2,145 | ||||||
Total assets | $ | 758,821 | $ | 596,149 | (4) | |||||
(1) | Net revenues include net interest and cost of power generation as set forth in the table below: |
Three Months | ||||||||
Ended | ||||||||
February | ||||||||
2006 | 2005 | |||||||
(in millions) | ||||||||
Investment Banking
|
$ | 1 | $ | 19 | ||||
Trading and Principal Investments
|
197 | 243 | ||||||
Asset Management and Securities
Services
|
426 | 355 | ||||||
Total net interest and cost of
power generation
|
$ | 624 | $ | 617 | ||||
(2) | Includes net provisions for a number of litigation and regulatory proceedings of $29 million and $31 million for the three months ended February 2006 and February 2005, respectively, that have not been allocated to the firms segments. |
(3) | Pre-tax earnings include total depreciation and amortization as set forth in the table below: |
Three Months | ||||||||
Ended | ||||||||
February | ||||||||
2006 | 2005 | |||||||
(in millions) | ||||||||
Investment Banking
|
$ | 31 | $ | 40 | ||||
Trading and Principal Investments
|
149 | 124 | ||||||
Asset Management and Securities
Services
|
39 | 34 | ||||||
Total depreciation and amortization
|
$ | 219 | $ | 198 | ||||
(4) | Includes certain assets that management believes are not allocable to a particular segment. |
43
44
Item 2.
Managements Discussion and Analysis of Financial
Condition and Results of Operations
45
46
Investment Banking.
We provide a broad range of
investment banking services to a diverse group of corporations,
financial institutions, governments and individuals.
Trading and Principal Investments.
We facilitate client
transactions with a diverse group of corporations, financial
institutions, governments and individuals and take proprietary
positions through market making in, trading of and investing in
fixed income and equity products, currencies, commodities and
derivatives on such products. In addition, we engage in
specialist and market-making activities on equities and options
exchanges and we clear client transactions on major stock,
options and futures exchanges worldwide. In connection with our
merchant banking and other investing activities, we make
principal investments directly and through funds that we raise
and manage.
Asset Management and Securities Services.
We provide
investment advisory and financial planning services and offer
investment products across all major asset classes to a diverse
group of institutions and individuals worldwide, and provide
prime brokerage services, financing services and securities
lending services to mutual funds, pension funds, hedge funds,
foundations and high-net-worth individuals worldwide.
47
(1)
Annualized return on average tangible common shareholders
equity is computed by dividing annualized net earnings
applicable to common shareholders by average monthly tangible
common shareholders equity. See Results
of Operations Financial Overview below for
further information regarding our calculation of annualized
return on average tangible common shareholders equity.
(2)
Statement 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. Effective for the first quarter of 2006, we adopted
SFAS No. 123-R, which requires that share-based awards
granted to retirement-eligible employees, including those
subject to non-compete agreements, be expensed in the year of
grant. In addition to expensing current year awards, prior year
awards must continue to be amortized over the relevant service
period. Therefore, our compensation and benefits expenses in
fiscal 2006 (and, to a lesser extent, in fiscal 2007 and fiscal 2008)
will include both amortization of prior year awards and new
awards granted to retirement-eligible employees for services
rendered in fiscal 2006. We believe that presenting our results
excluding the impact of the continued amortization of prior year
share-based awards granted to retirement-eligible employees
increases the comparability of
period-to-period
operating results and allows for a more meaningful
representation of the relationship of current period
compensation and benefits to net revenues.
The following tables set forth a reconciliation of diluted
earnings per common share, common shareholders equity and
net earnings applicable to common shareholders as reported, to
these items excluding the impact of the continued amortization
of prior year share-based awards granted to retirement-eligible
employees:
Three Months Ended | ||||
February 2006 | ||||
Diluted earnings per common share
|
$ | 5.08 | ||
Impact of the continued
amortization of prior year share-based awards, net of tax
|
0.33 | |||
Diluted earnings per common share,
excluding the impact of the continued amortization
of prior year share-based awards |
$ | 5.41 | ||
Average for the | ||||
Three Months Ended | ||||
February 2006 | ||||
(in millions) | ||||
Total shareholders equity
|
$ | 28,724 | ||
Preferred stock
|
(1,750 | ) | ||
Common shareholders equity
|
26,974 | |||
Impact of the continued
amortization of prior year share-based awards, net of tax
|
(48 | ) | ||
Common shareholders equity,
excluding the impact of the continued amortization
of prior year share-based awards |
26,926 | |||
Goodwill and certain identifiable
intangible assets
|
(4,687 | ) | ||
Tangible common shareholders
equity (see footnote 1 above), excluding the impact of the
continued amortization
of prior year share-based awards |
$ | 22,239 | ||
Three Months Ended | ||||
February 2006 | ||||
(in millions) | ||||
Net earnings applicable to common
shareholders
|
$ | 2,453 | ||
Impact of the continued
amortization of prior year share-based awards, net of tax
|
159 | |||
Net earnings applicable to common
shareholders, excluding the impact of the
continued amortization of prior year share-based awards |
$ | 2,612 | ||
(3) | Our investment banking backlog represents an estimate of our future net revenues from investment banking transactions where we believe that future revenue realization is more likely than not. |
48
49
As of February 2006 | As of November 2005 | |||||||||||||||
Financial | Financial | |||||||||||||||
Financial | Instruments Sold, | Financial | Instruments Sold, | |||||||||||||
Instruments | But Not Yet | Instruments | But Not Yet | |||||||||||||
Owned, At | Purchased, At | Owned, At | Purchased, At | |||||||||||||
Fair Value | Fair Value | Fair Value | Fair Value | |||||||||||||
Cash trading instruments
|
$ | 225,537 | (1) | $ | 96,926 | $ | 210,042 | $ | 89,735 | |||||||
Derivative contracts
|
56,907 | 55,259 | 58,532 | 57,829 | ||||||||||||
Principal investments
|
7,739 | (2) | 1,702 | (3) | 6,526 | (2) | 1,507 | (3) | ||||||||
Total
|
$ | 290,183 | $ | 153,887 | $ | 275,100 | $ | 149,071 | ||||||||
(1) | Includes approximately $1.40 billion of U.S. government, federal agency and other debt instruments, which are held by our insurance subsidiaries and accounted for as available-for-sale securities under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. | |
(2) | Excludes assets for which Goldman Sachs is not at risk (e.g., assets related to consolidated employee-owned merchant banking funds) of $2.09 billion and $1.93 billion as of February 2006 and November 2005, respectively. | |
(3) | Represents an economic hedge on the unrestricted shares of common stock underlying our investment in the convertible preferred stock of SMFG. For a further discussion of our investment in SMFG, see Principal Investments below. |
As of February 2006 | As of November 2005 | |||||||||||||||
Financial | Financial | |||||||||||||||
Financial | Instruments Sold, | Financial | Instruments Sold, | |||||||||||||
Instruments | But Not Yet | Instruments | But Not Yet | |||||||||||||
Owned, At | Purchased, At | Owned, At | Purchased, At | |||||||||||||
Fair Value | Fair Value | Fair Value | Fair Value | |||||||||||||
Quoted prices or alternative
pricing sources with reasonable price transparency
|
$ | 211,273 | $ | 96,771 | $ | 198,233 | $ | 89,565 | ||||||||
Little or no price transparency
|
14,264 | 155 | 11,809 | 170 | ||||||||||||
Total
|
$ | 225,537 | $ | 96,926 | $ | 210,042 | $ | 89,735 | ||||||||
50
As of February 2006 | As of November 2005 | |||||||||||||||
Assets | Liabilities | Assets | Liabilities | |||||||||||||
Exchange-traded derivatives
|
$ | 11,758 | $ | 10,226 | $ | 10,869 | $ | 9,083 | ||||||||
OTC derivatives
|
45,149 | 45,033 | 47,663 | 48,746 | ||||||||||||
Total
|
$ | 56,907 | (1) | $ | 55,259 | (2) | $ | 58,532 | (1) | $ | 57,829 | (2) | ||||
(1) | Net of cash received pursuant to credit support agreements of $23.69 billion and $22.61 billion as of February 2006 and November 2005, respectively. | |
(2) | Net of cash paid pursuant to credit support agreements of $17.86 billion and $16.10 billion as of February 2006 and November 2005, respectively. |
51
Assets | As of February 2006 | |||||||||||||||||||||||
0 - 6 | 6 - 12 | 1 - 5 | 5 - 10 | 10 Years | ||||||||||||||||||||
Contract Type | Months | Months | Years | Years | or Greater | Total | ||||||||||||||||||
Interest rates
|
$ | 966 | $ | 533 | $ | 4,955 | $ | 4,581 | $ | 5,762 | $ | 16,797 | ||||||||||||
Currencies
|
3,265 | 601 | 2,160 | 1,008 | 1,086 | 8,120 | ||||||||||||||||||
Commodities
|
2,629 | 3,369 | 7,459 | 1,205 | 171 | 14,833 | ||||||||||||||||||
Equities
|
1,262 | 783 | 1,090 | 2,009 | 255 | 5,399 | ||||||||||||||||||
Total
|
$ | 8,122 | $ | 5,286 | $ | 15,664 | $ | 8,803 | $ | 7,274 | $ | 45,149 | ||||||||||||
Liabilities | ||||||||||||||||||||||||
0 - 6 | 6 - 12 | 1 - 5 | 5 - 10 | 10 Years | ||||||||||||||||||||
Contract Type | Months | Months | Years | Years | or Greater | Total | ||||||||||||||||||
Interest rates
|
$ | 1,355 | $ | 818 | $ | 4,770 | $ | 3,050 | $ | 4,988 | $ | 14,981 | ||||||||||||
Currencies
|
3,493 | 769 | 2,745 | 459 | 720 | 8,186 | ||||||||||||||||||
Commodities
|
2,442 | 3,260 | 5,985 | 1,656 | 139 | 13,482 | ||||||||||||||||||
Equities
|
1,630 | 1,337 | 1,932 | 3,201 | 284 | 8,384 | ||||||||||||||||||
Total
|
$ | 8,920 | $ | 6,184 | $ | 15,432 | $ | 8,366 | $ | 6,131 | $ | 45,033 | ||||||||||||
Assets | As of November 2005 | |||||||||||||||||||||||
0 - 6 | 6 - 12 | 1 - 5 | 5 - 10 | 10 Years | ||||||||||||||||||||
Contract Type | Months | Months | Years | Years | or Greater | Total | ||||||||||||||||||
Interest rates
|
$ | 1,898 | $ | 467 | $ | 4,634 | $ | 5,310 | $ | 5,221 | $ | 17,530 | ||||||||||||
Currencies
|
5,825 | 1,031 | 1,843 | 919 | 1,046 | 10,664 | ||||||||||||||||||
Commodities
|
3,772 | 1,369 | 8,130 | 1,374 | 120 | 14,765 | ||||||||||||||||||
Equities
|
1,168 | 1,171 | 832 | 1,403 | 130 | 4,704 | ||||||||||||||||||
Total
|
$ | 12,663 | $ | 4,038 | $ | 15,439 | $ | 9,006 | $ | 6,517 | $ | 47,663 | ||||||||||||
Liabilities | ||||||||||||||||||||||||
0 - 6 | 6 - 12 | 1 - 5 | 5 - 10 | 10 Years | ||||||||||||||||||||
Contract Type | Months | Months | Years | Years | or Greater | Total | ||||||||||||||||||
Interest rates
|
$ | 1,956 | $ | 590 | $ | 5,327 | $ | 3,142 | $ | 4,970 | $ | 15,985 | ||||||||||||
Currencies
|
6,295 | 575 | 3,978 | 436 | 924 | 12,208 | ||||||||||||||||||
Commodities
|
3,852 | 2,080 | 5,904 | 1,865 | 162 | 13,863 | ||||||||||||||||||
Equities
|
1,308 | 1,068 | 2,079 | 1,993 | 242 | 6,690 | ||||||||||||||||||
Total
|
$ | 13,411 | $ | 4,313 | $ | 17,288 | $ | 7,436 | $ | 6,298 | $ | 48,746 | ||||||||||||
52
As of February 2006 | As of November 2005 | |||||||||||||||||||||||
Corporate | Real Estate | Total | Corporate | Real Estate | Total | |||||||||||||||||||
Private
|
$ | 1,933 | $ | 678 | $ | 2,611 | $ | 1,538 | $ | 716 | $ | 2,254 | ||||||||||||
Public
|
386 | 8 | 394 | 185 | 29 | 214 | ||||||||||||||||||
Subtotal
(1)
|
2,319 | 686 | 3,005 | 1,723 | 745 | 2,468 | ||||||||||||||||||
SMFG convertible
preferred stock (2) (3) |
4,734 | | 4,734 | 4,058 | | 4,058 | ||||||||||||||||||
Total
|
$ | 7,053 | $ | 686 | $ | 7,739 | $ | 5,781 | $ | 745 | $ | 6,526 | ||||||||||||
(1) | Excludes assets for which Goldman Sachs is not at risk (e.g., assets related to consolidated employee-owned merchant banking funds) of $2.09 billion and $1.93 billion as of February 2006 and November 2005, respectively. | |
(2) | The fair value of our Japanese yen-denominated investment in the convertible preferred stock of SMFG includes the effect of foreign exchange revaluation. We hedge our economic exposure to exchange rate movements on our investment in SMFG by borrowing Japanese yen. Foreign exchange revaluation on the investment and the related borrowing are generally equal and offsetting. For example, if the Japanese yen appreciates against the U.S. dollar, the U.S. dollar carrying value of our SMFG investment will increase and the U.S. dollar carrying value of the related borrowing will also increase by an amount that is generally equal and offsetting. | |
(3) | Excludes an economic hedge on the unrestricted shares of common stock underlying our investment in the convertible preferred stock of SMFG. The fair value of this hedge was $1.70 billion and $1.51 billion as of February 2006 and November 2005, respectively, and is reflected in Financial instruments sold, but not yet purchased, at fair value in the condensed consolidated statements of financial condition. For a further discussion of the restrictions on our ability to hedge or sell the common stock underlying our investment in SMFG, see below. |
53
54
As of | |||||||||
February | November | ||||||||
2006 | 2005 | ||||||||
Investment Banking
|
|||||||||
Financial Advisory
|
$ | | $ | | |||||
Underwriting
|
125 | 125 | |||||||
Trading and Principal Investments
|
|||||||||
FICC
|
67 | 91 | |||||||
Equities
(1)
|
2,388 | 2,390 | |||||||
Principal Investments
|
3 | 1 | |||||||
Asset Management and Securities
Services
|
|||||||||
Asset Management
(2)
|
424 | 424 | |||||||
Securities Services
|
117 | 117 | |||||||
Total
|
$ | 3,124 | $ | 3,148 | |||||
(1) | Primarily related to SLK. |
(2) | Primarily related to Ayco. |
55
As of February 2006 | As of November 2005 | |||||||||||
Range of Remaining | ||||||||||||
Carrying | Useful Lives | Carrying | ||||||||||
Value | (in years) | Value | ||||||||||
Customer lists
(1)
|
$ | 764 | 6 19 | $ | 777 | |||||||
Power contracts
(2)
|
719 | 2 22 | 481 | |||||||||
New York Stock Exchange (NYSE)
specialist rights
|
572 | 16 (5) | 580 | |||||||||
Value of business acquired (VOBA)
(3)
|
279 | 7 | | |||||||||
Exchange-traded fund (ETF)
specialist rights
|
109 | 22 | 111 | |||||||||
Other
(4)
|
100 | 2 9 | 106 | |||||||||
Total
|
$ | 2,543 | $ | 2,055 | ||||||||
(1) | Primarily includes our clearance and execution and NASDAQ customer lists related to SLK and financial counseling customer lists related to Ayco. |
(2) | Primarily relates to above-market power contracts of consolidated power generation facilities related to Cogentrix and NEGT. Substantially all of these power contracts have been pledged as collateral to counterparties in connection with certain of our secured short-term and long-term borrowings. | |
(3) | Represents the present value of estimated future gross profits of the variable annuity and variable life insurance business acquired in fiscal 2006. VOBA is amortized over the estimated life of the underlying contracts based on estimated gross profits, and amortization is adjusted based on actual experience. The seven year useful life represents the weighted average remaining amortization period of the underlying contracts (certain of which extend approximately 30 years). | |
(4) | Primarily includes technology-related and other assets related to SLK. | |
(5) | During the first quarter of 2006, we reduced the estimated useful lives of our NYSE specialist rights from 22 - 24 years to 16 years. This change was due to higher than expected attrition in acquired NYSE specialist rights, primarily from mergers and delistings. |
56
(1)
Our ratio of compensation and benefits to net revenues,
excluding the impact of the continued amortization of prior year
share-based awards, is computed by dividing compensation and
benefits, excluding the impact of the continued amortization of
prior year share-based awards, by net revenues. We believe that
presenting the ratio of compensation and benefits to net
revenues excluding the impact of the continued amortization of
prior year share-based awards granted to retirement-eligible
employees increases the comparability of
period-to-period
operating results and allows for a more meaningful
representation of the relationship of current period
compensation and benefits to net revenues. The following table
sets forth the reconciliation of the ratio of compensation and
benefits to net revenues as reported, to the ratio of
compensation and benefits to net revenues excluding the impact
of the continued amortization of prior year share-based awards:
Three Months Ended | ||||
February 2006 | ||||
($ in millions) | ||||
Compensation and benefits
|
$ | 5,301 | ||
Impact of the continued
amortization of prior year share-based awards
|
(237 | ) | ||
Compensation and benefits,
excluding the impact of the continued amortization of prior year
share-based awards
|
$ | 5,064 | ||
Net revenues
|
$ | 10,335 | ||
Ratio of compensation and benefits
to net revenues, excluding the impact of the continued
amortization of prior year share-based awards
|
49.0 | % |
57
Three Months | ||||||||
Ended February | ||||||||
2006 | 2005 | |||||||
Net revenues
|
$ | 10,335 | $ | 6,405 | ||||
Pre-tax earnings
|
3,689 | 2,145 | ||||||
Net earnings
|
2,479 | 1,512 | ||||||
Net earnings applicable to common
shareholders
|
2,453 | 1,512 | ||||||
Diluted earnings per common share
|
5.08 | 2.94 | ||||||
Annualized return on average common
shareholders equity
(1)
|
36.4 | % | 23.5 | % | ||||
Annualized return on average
tangible common shareholders equity
(2)
|
44.0 | % | 28.9 | % |
(1) |
Annualized return on average common shareholders equity is computed by dividing annualized net earnings applicable to common shareholders by average monthly common shareholders equity. | |
(2) |
Tangible common shareholders equity equals total shareholders equity less preferred stock, goodwill and certain identifiable intangible assets (primarily customer lists and specialist rights). In the first quarter of 2006, we amended our calculation of tangible common shareholders equity to deduct only certain identifiable intangible assets from total shareholders equity. We no longer deduct identifiable intangible assets associated with power contracts and we do not deduct VOBA, which is related to our insurance business acquired in the first quarter of 2006. Prior periods have been restated to conform to the current period presentation. |
We believe that annualized return on average tangible common shareholders equity is a meaningful measure of performance because it excludes the portion of our common shareholders equity attributable to goodwill and certain identifiable intangible assets. As a result, this calculation measures corporate performance in a manner that treats underlying businesses consistently, whether they were acquired or developed internally. Annualized return on average tangible common shareholders equity is computed by dividing annualized net earnings applicable to common shareholders by average monthly tangible common shareholders equity. The following table sets forth a reconciliation of average total shareholders equity to average tangible common shareholders equity: |
Average for the | ||||||||
Three Months | ||||||||
Ended February | ||||||||
2006 | 2005 | |||||||
(in millions) | ||||||||
Total shareholders equity
|
$ | 28,724 | $ | 25,735 | ||||
Preferred stock
|
(1,750 | ) | | |||||
Common shareholders equity
|
26,974 | 25,735 | ||||||
Goodwill and certain identifiable
intangible assets
|
(4,687 | ) | (4,799 | ) | ||||
Tangible common shareholders
equity
|
$ | 22,287 | $ | 20,936 | ||||
58
59
Net Revenues
Operating Expenses
Three Months | ||||||||
Ended February | ||||||||
2006 | 2005 | |||||||
Compensation and benefits
(1)
|
$ | 5,301 | $ | 3,203 | ||||
Brokerage, clearing and exchange
fees
|
351 | 252 | ||||||
Market development
|
100 | 82 | ||||||
Communications and technology
|
124 | 118 | ||||||
Depreciation and amortization
|
125 | 118 | ||||||
Amortization of identifiable
intangible assets
|
34 | 31 | ||||||
Occupancy
|
193 | 148 | ||||||
Professional fees
|
109 | 96 | ||||||
Other expenses
|
309 | 212 | ||||||
Total non-compensation expenses
|
1,345 | 1,057 | ||||||
Total operating expenses
|
$ | 6,646 | $ | 4,260 | ||||
Employees at period end
(1) (2)
|
23,641 | 21,606 |
(1) |
Excludes 8,171 and 536 employees as of February 2006 and February 2005, respectively, of consolidated entities held for investment purposes. Compensation and benefits includes $51 million and $5 million for the three months ended February 2006 and February 2005, respectively, attributable to these consolidated entities. Consolidated entities held for investment purposes includes entities that are held strictly for capital appreciation, have a defined exit strategy and are engaged in activities that are not closely related to our principal businesses. | |
(2) |
Beginning with the first quarter of 2006, includes 1,168 employees of Goldman Sachs consolidated property management and loan servicing subsidiaries. The prior year period has been restated to conform to the current presentation and includes 928 such employees. |
60
Three Months | ||||||||
Ended February | ||||||||
2006 | 2005 | |||||||
Non-compensation expenses of
consolidated investments
(1)
|
$ | 99 | $ | 15 | ||||
Non-compensation expenses excluding
consolidated investments
|
||||||||
Brokerage, clearing and exchange
fees
|
351 | 252 | ||||||
Market development
|
92 | 82 | ||||||
Communications and technology
|
123 | 118 | ||||||
Depreciation and amortization
|
112 | 116 | ||||||
Amortization of identifiable
intangible assets
|
34 | 31 | ||||||
Occupancy
|
169 | 148 | ||||||
Professional fees
|
105 | 96 | ||||||
Other expenses
|
260 | 199 | ||||||
Subtotal
|
1,246 | 1,042 | ||||||
Total non-compensation expenses, as
reported
|
$ | 1,345 | $ | 1,057 | ||||
(1) |
Consolidated entities held for investment purposes includes entities that are held strictly for capital appreciation, have a defined exit strategy and are engaged in activities that are not closely related to our principal businesses. For example, these investments include consolidated entities that hold real estate assets such as golf courses and hotels in Asia, but exclude investments in entities that primarily hold financial assets. We believe that it is meaningful to review non-compensation expenses excluding expenses related to these consolidated entities in order to evaluate trends in non-compensation expenses related to our principal business activities. Revenues related to such entities are included in Trading and principal investments in the condensed consolidated statements of earnings. |
61
Provision for Taxes
Three Months | ||||||||||||
Ended February | ||||||||||||
2006 | 2005 | |||||||||||
Investment
|
Net revenues | $ | 1,471 | $ | 893 | |||||||
Banking
|
Operating expenses | 1,189 | 787 | |||||||||
Pre-tax earnings | $ | 282 | $ | 106 | ||||||||
Trading and Principal
|
Net revenues | $ | 6,884 | $ | 4,383 | |||||||
Investments
|
Operating expenses | 4,329 | 2,729 | |||||||||
Pre-tax earnings | $ | 2,555 | $ | 1,654 | ||||||||
Asset Management and
|
Net revenues | $ | 1,980 | $ | 1,129 | |||||||
Securities Services
|
Operating expenses | 1,099 | 713 | |||||||||
Pre-tax earnings | $ | 881 | $ | 416 | ||||||||
Total
|
Net revenues | $ | 10,335 | $ | 6,405 | |||||||
Operating expenses (1) | 6,646 | 4,260 | ||||||||||
Pre-tax earnings | $ | 3,689 | $ | 2,145 | ||||||||
(1) | Includes net provisions for a number of litigation and regulatory proceedings of $29 million and $31 million for the three months ended February 2006 and February 2005, respectively, that have not been allocated to our segments. |
62
Investment Banking
Financial Advisory.
Financial Advisory includes advisory
assignments with respect to mergers and acquisitions,
divestitures, corporate defense activities, restructurings and
spin-offs.
Underwriting.
Underwriting includes public offerings and
private placements of equity, equity-related and debt
instruments.
Three Months | |||||||||
Ended February | |||||||||
2006 | 2005 | ||||||||
Financial Advisory
|
$ | 736 | $ | 414 | |||||
Equity underwriting
|
283 | 186 | |||||||
Debt underwriting
|
452 | 293 | |||||||
Total Underwriting
|
735 | 479 | |||||||
Total net revenues
|
1,471 | 893 | |||||||
Operating expenses
|
1,189 | 787 | |||||||
Pre-tax earnings
|
$ | 282 | $ | 106 | |||||
Three Months | ||||||||
Ended February | ||||||||
2006 | 2005 | |||||||
Announced mergers and acquisitions
|
$ | 323 | $ | 255 | ||||
Completed mergers and acquisitions
|
250 | 123 | ||||||
Equity and equity-related
offerings (2)
|
15 | 10 | ||||||
Debt
offerings (3)
|
79 | 76 |
(1) | Source: Thomson Financial. Announced and completed mergers and acquisitions volumes are based on full credit to each of the advisors in a transaction. Equity and equity-related offerings and debt offerings are based on full credit for single book managers and equal credit for joint book managers. Transaction volumes may not be indicative of net revenues in a given period. | |
(2) | Includes public common stock offerings and convertible offerings. | |
(3) | Includes non-convertible preferred stock, mortgage-backed securities, asset-backed securities and taxable municipal debt. Includes publicly registered and Rule 144A issues. |
63
64
Trading and Principal Investments
FICC.
We make markets in and trade interest rate and
credit products, mortgage-backed securities and loans,
currencies, and commodities, structure and enter into a wide
variety of derivative transactions and engage in proprietary
trading and investing.
Equities.
We make markets in, trade and act as a
specialist for equities and equity-related products, structure
and enter into equity derivative transactions and engage in
proprietary trading. We also execute and clear client
transactions on major stock, options and futures exchanges
worldwide.
Principal Investments.
We generate net revenues from our
corporate and real estate merchant banking investments,
including the increased share of the income and gains derived
from our merchant banking funds when the return on a funds
investments exceeds certain threshold returns (merchant banking
overrides), as well as gains or losses related to our investment
in the convertible preferred stock of SMFG.
(1)
Our investment banking backlog represents an estimate of our
future net revenues from investment banking transactions where
we believe that future revenue realization is more likely than
not.
Three Months | ||||||||||
Ended February | ||||||||||
2006 | 2005 | |||||||||
FICC
|
$ | 3,740 | $ | 2,489 | ||||||
Equities trading
|
1,607 | 829 | ||||||||
Equities commissions
|
842 | 721 | ||||||||
Total Equities
|
2,449 | 1,550 | ||||||||
SMFG
|
405 | 181 | ||||||||
Gross gains
|
301 | 177 | ||||||||
Gross losses
|
(101 | ) | (29 | ) | ||||||
Net other corporate and real estate
investments
|
200 | 148 | ||||||||
Overrides
|
90 | 15 | ||||||||
Total Principal Investments
|
695 | 344 | ||||||||
Total net revenues
|
6,884 | 4,383 | ||||||||
Operating expenses
|
4,329 | 2,729 | ||||||||
Pre-tax earnings
|
$ | 2,555 | $ | 1,654 | ||||||
65
Asset Management and Securities Services
Asset Management.
Asset Management provides investment
advisory and financial planning services and offers investment
products 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.
Securities Services.
Securities Services provides prime
brokerage services, financing services and securities lending
services to mutual funds, pension funds, hedge funds,
foundations and high-net-worth individuals worldwide, and
generates revenues primarily in the form of interest rate
spreads or fees.
Three Months | |||||||||
Ended February | |||||||||
2006 | 2005 | ||||||||
Management and other fees
|
$ | 750 | $ | 618 | |||||
Incentive fees
|
739 | 131 | |||||||
Total Asset Management
|
1,489 | 749 | |||||||
Securities Services
|
491 | 380 | |||||||
Total net revenues
|
1,980 | 1,129 | |||||||
Operating expenses
|
1,099 | 713 | |||||||
Pre-tax earnings
|
$ | 881 | $ | 416 | |||||
66
As of | As of | |||||||||||||||
February 28, | November 30, | |||||||||||||||
2006 | 2005 | 2005 | 2004 | |||||||||||||
Money markets
|
$ | 106 | $ | 99 | $ | 101 | $ | 90 | ||||||||
Fixed income
|
165 | 139 | 154 | 134 | ||||||||||||
Equity
|
181 | 144 | 167 | 133 | ||||||||||||
Alternative
investments (2)
|
119 | 100 | 110 | 95 | ||||||||||||
Total
|
$ | 571 | $ | 482 | $ | 532 | $ | 452 | ||||||||
(1) | In the first quarter of 2006, the methodology for classifying certain non-money market assets was changed. The changes were primarily to reclassify certain assets allocated to external investment managers out of alternative investment assets and to reclassify currency funds into alternative investment assets. The changes did not impact total assets under management and prior periods have been restated to conform to the current period presentation. | |
(2) | Primarily includes private equity funds, hedge funds, real estate funds, currency funds and asset allocation strategies. |
Three Months Ended | |||||||||
February 28, | February 28, | ||||||||
2006 | 2005 | ||||||||
Balance, beginning of period
|
$ | 532 | $ | 452 | |||||
Net asset inflows/(outflows)
|
|||||||||
Money markets
|
5 | 9 | |||||||
Fixed income
|
8 | 6 | |||||||
Equity
|
5 | 9 | |||||||
Alternative investments
|
7 | 3 | |||||||
Total net asset inflows/(outflows)
|
25 | (1) | 27 | ||||||
Net market
appreciation/(depreciation)
|
14 | 3 | |||||||
Balance, end of period
|
$ | 571 | $ | 482 | |||||
(1) | Includes $3 billion of net asset inflows in connection with the December 30, 2005 acquisition of the variable annuity and variable life insurance business of The Hanover Insurance Group, Inc. |
67
68
Shares | Shares | Earliest | Redemption Value | |||||||||||||
Series | Description | Issued | Authorized | Redemption Date | (in millions) | |||||||||||
A
|
Perpetual Floating Rate | 30,000 | 50,000 | April 25, 2010 | $ | 750 | ||||||||||
Non-Cumulative | ||||||||||||||||
B
|
Perpetual 6.20% | 32,000 | 50,000 | October 31, 2010 | 800 | |||||||||||
Non-Cumulative | ||||||||||||||||
C
|
Perpetual Floating Rate | 8,000 | 25,000 | October 31, 2010 | 200 | |||||||||||
Non-Cumulative | ||||||||||||||||
70,000 | 125,000 | $ | 1,750 | |||||||||||||
69
As of | ||||||||
February | November | |||||||
2006 | 2005 | |||||||
($ in millions, except per share amounts) | ||||||||
Total assets
|
$ | 758,821 | $ | 706,804 | ||||
Adjusted assets
(1)
|
495,365 | 466,500 | ||||||
Total shareholders equity
|
28,915 | 28,002 | ||||||
Tangible equity capital
(2)
|
26,996 | 26,030 | ||||||
Leverage ratio
(3)
|
26.2 | x | 25.2 | x | ||||
Adjusted leverage ratio
(4)
|
18.3 | x | 17.9 | x | ||||
Debt to equity ratio
(5)
|
4.0 | x | 3.6 | x | ||||
Common shareholders equity
|
27,165 | 26,252 | ||||||
Tangible common shareholders
equity
(6)
|
22,496 | 21,530 | ||||||
Book value per common share
(7)
|
$ | 60.42 | $ | 57.02 | ||||
Tangible book value per common
share
(8)
|
50.04 | 46.76 |
(1) | Adjusted assets excludes (i) low-risk collateralized assets generally associated with our matched book and securities lending businesses (which we calculate by adding our securities purchased under agreements to resell and securities borrowed, and then subtracting our nonderivative short positions), (ii) cash and securities we segregate for regulatory and other purposes and (iii) goodwill and certain identifiable intangible assets (primarily customer lists and specialist rights). In the first quarter of 2006, we amended our calculation of adjusted assets to deduct only certain identifiable intangible assets from total assets. We no longer deduct identifiable intangible assets associated with power contracts and we do not deduct VOBA, which is related to our insurance business acquired in the first quarter of 2006. Prior periods have been restated to conform to the current period presentation. The following table sets forth a reconciliation of total assets to adjusted assets: |
As of | ||||||||||
February | November | |||||||||
2006 | 2005 | |||||||||
(in millions) | ||||||||||
Total assets | $ | 758,821 | $ | 706,804 | ||||||
Deduct:
|
Securities borrowed
|
(200,017 | ) | (191,800 | ) | |||||
Securities purchased under
agreements to resell
|
(96,442 | ) | (83,619 | ) | ||||||
Add:
|
Financial instruments sold, but not
yet purchased, at fair value
|
153,887 | 149,071 | |||||||
Less derivative liabilities
|
(55,259 | ) | (57,829 | ) | ||||||
Subtotal
|
98,628 | 91,242 | ||||||||
Deduct:
|
Cash and securities segregated for
regulatory and other purposes
|
(60,956 | ) | (51,405 | ) | |||||
Goodwill and certain identifiable
intangible assets
|
(4,669 | ) | (4,722 | ) | ||||||
Adjusted assets | $ | 495,365 | $ | 466,500 | ||||||
(2) | Tangible equity capital equals total shareholders equity and junior subordinated debt issued to a trust less goodwill and certain identifiable intangible assets (primarily customer lists and specialist rights). In the first quarter of 2006, we amended our calculation of tangible equity capital to deduct only certain identifiable intangible assets from total shareholders equity. We no longer deduct identifiable intangible assets associated with power contracts and we do not deduct VOBA, which is related to our insurance business acquired in the first quarter of 2006. Prior periods have been restated to conform to the current period presentation. We consider junior subordinated debt issued to a trust to be a component of our tangible equity capital base due to the inherent characteristics of these securities, including the long-term nature of the securities, our ability to defer coupon interest for up to ten consecutive semiannual periods and the subordinated nature of the obligations in our capital structure. |
70
The following table sets forth the reconciliation of total
shareholders equity to tangible equity capital:
As of | ||||||||||
February | November | |||||||||
2006 | 2005 | |||||||||
(in millions) | ||||||||||
Total shareholders equity | $ | 28,915 | $ | 28,002 | ||||||
Add:
|
Junior subordinated debt issued to
a trust
|
2,750 | 2,750 | |||||||
Deduct:
|
Goodwill and certain identifiable
intangible assets
|
(4,669 | ) | (4,722 | ) | |||||
Tangible equity capital | $ | 26,996 | $ | 26,030 | ||||||
(3) | Leverage ratio equals total assets divided by total shareholders equity. | |
(4) | Adjusted leverage ratio equals adjusted assets divided by tangible equity capital. We believe that the adjusted leverage ratio is a more meaningful measure of our capital adequacy than the leverage ratio because it excludes certain low-risk collateralized assets that are generally supported with little or no capital and reflects the tangible equity capital deployed in our businesses. | |
(5) | Debt to equity ratio equals long-term borrowings divided by total shareholders equity. | |
(6) | Tangible common shareholders equity equals total shareholders equity less preferred stock, goodwill and certain identifiable intangible assets (primarily customer lists and specialist rights). In the first quarter of 2006, we amended our calculation of tangible common shareholders equity to deduct only certain identifiable intangible assets from total shareholders equity. We no longer deduct identifiable intangible assets associated with power contracts and we do not deduct VOBA, which is related to our insurance business acquired in the first quarter of 2006. Prior periods have been restated to conform to the current period presentation. The following table sets forth a reconciliation of total shareholders equity to tangible common shareholders equity: |
As of | ||||||||||
February | November | |||||||||
2006 | 2005 | |||||||||
(in millions) | ||||||||||
Total shareholders equity | $ | 28,915 | $ | 28,002 | ||||||
Deduct:
|
Preferred stock
|
(1,750 | ) | (1,750 | ) | |||||
Common shareholders equity | 27,165 | 26,252 | ||||||||
Deduct:
|
Goodwill and certain identifiable
intangible assets
|
(4,669 | ) | (4,722 | ) | |||||
Tangible common shareholders equity | $ | 22,496 | $ | 21,530 | ||||||
(7) | Book value per common share is based on common shares outstanding, including restricted stock units granted to employees with no future service requirements, of 449.6 million as of February 2006 and 460.4 million as of November 2005. | |
(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. |
Consolidated Supervised Entity |
71
As of | ||||||||
February | November | |||||||
2006 | 2005 | |||||||
Promissory notes
|
$ | 18,996 | $ | 17,339 | ||||
Commercial paper
|
5,533 | 5,154 | ||||||
Secured debt, bank loans and other
|
16,352 | 15,975 | ||||||
Current portion of secured and
unsecured long-term borrowings
|
17,471 | 16,751 | ||||||
Total (1)
|
$ | 58,352 | $ | 55,219 | ||||
(1) | Short-term borrowings as of February 2006 include $325 million of hybrid financial instruments accounted for at fair value under SFAS No. 155, Accounting for Certain Hybrid Financial Instruments an amendment of FASB Statements No. 133 and 140. |
As of | ||||||||
February | November | |||||||
2006 | 2005 | |||||||
(in millions) | ||||||||
Secured short-term borrowings
|
$ | 8,482 | $ | 7,972 | ||||
Unsecured short-term borrowings
|
49,870 | 47,247 | ||||||
Total short-term borrowings
|
$ | 58,352 | $ | 55,219 | ||||
72
Short-Term Debt | Long-Term Debt | Preferred Stock | ||||||||||
Dominion Bond Rating Service Limited
|
R-1 (middle) | AA (low) (1) | N/A | |||||||||
Fitch, Inc.
|
F1+ | AA- | A+ | |||||||||
Moodys Investors Service
|
P-1 | Aa3 | A2 | |||||||||
Standard & Poors
(2)
|
A-1 | A+ | A- |
(1) | On March 17, 2006, Dominion Bond Rating Service Limited upgraded Goldman Sachs long-term debt issuer rating from A (high) to AA (low). | |
(2) | On October 11, 2005, Standard & Poors affirmed Goldman Sachs long-term debt rating and revised its outlook from stable to positive. |
73
Remainder | 2007- | 2009- | 2011- | |||||||||||||||||
2006 | 2008 | 2010 | Thereafter | Total | ||||||||||||||||
Long-term borrowings
(1)
(2) (3)
|
$ | | $ | 24,920 | $ | 29,310 | $ | 60,421 | $ | 114,651 | ||||||||||
Minimum rental payments
|
302 | 907 | 621 | 2,199 | 4,029 |
(1) | Long-term borrowings maturing within one year of our financial statement date and certain long-term borrowings that are redeemable within one year of our financial statement date at the option of the holder are included as short-term borrowings in the condensed consolidated statements of financial condition. | |
(2) | Long-term borrowings that are repayable prior to maturity at the option of Goldman Sachs are reflected at their contractual maturity dates. Long-term borrowings that are redeemable prior to maturity at the option of the holder are reflected at the dates such options become exercisable. | |
(3) | Long-term borrowings as of February 2006 include $835 million of hybrid financial instruments accounted for at fair value under SFAS No. 155. |
74
75
(1)
Our long-term borrowings include extendible debt if the earliest
maturity is one year or greater from our financial statement
date. Extendible debt is categorized in the maturity profile at
the earliest possible maturity even though the debt can be, and
in the past generally has been, extended.
Commitment Amount by Fiscal Period of Expiration | ||||||||||||||||||||||
Remainder | 2007- | 2009- | 2011- | |||||||||||||||||||
of 2006 | 2008 | 2010 | Thereafter | Total | ||||||||||||||||||
Commitments to extend credit
|
||||||||||||||||||||||
William Street program
|
$ | 1,535 | $ | 1,865 | $ | 8,600 | $ | 2,943 | $ | 14,943 | ||||||||||||
Other commercial lending:
|
||||||||||||||||||||||
Investment-grade
|
1,577 | 4,853 | 2,796 | 2,668 | 11,894 | |||||||||||||||||
Non-investment-grade
|
783 | 1,592 | 1,734 | 11,541 | 15,650 | |||||||||||||||||
Warehouse financing
|
12,558 | 3,124 | 166 | 86 | 15,934 | |||||||||||||||||
Total commitments to extend credit
|
16,453 | 11,434 | 13,296 | 17,238 | 58,421 | |||||||||||||||||
Commitments under letters of credit
issued by banks to counterparties
|
7,747 | 366 | 50 | | 8,163 | |||||||||||||||||
Merchant banking commitments
|
16 | 151 | 2,715 | 1,495 | 4,377 | |||||||||||||||||
Underwriting commitments
|
2,879 | | | | 2,879 | |||||||||||||||||
Other commercial commitments
(1)
|
3,872 | 759 | 22 | 11 | 4,664 | |||||||||||||||||
Total
|
$ | 30,967 | $ | 12,710 | $ | 16,083 | $ | 18,744 | $ | 78,504 | ||||||||||||
(1) | Includes construction-related commitments and other purchase commitments. |
76
77
Excess Liquidity maintain substantial excess
liquidity to meet a broad range of potential cash outflows in a
stressed environment including financing obligations.
Asset-Liability Management ensure we fund our assets
with appropriate financing.
Intercompany Funding maintain parent company
liquidity and manage the distribution of liquidity across the
group structure.
Crisis Planning ensure all funding and liquidity
management is based on stress-scenario planning and feeds into
our liquidity crisis plan.
Excess Liquidity
The first days or weeks of a liquidity crisis are the most
critical to a companys survival.
Focus must be maintained on all potential cash and collateral
outflows, not just disruptions to financing flows. Goldman
Sachs businesses are diverse, and its cash needs are
driven by many factors, including market movements, collateral
requirements and client commitments, all of which can change
dramatically in a difficult funding environment.
During a liquidity crisis, credit-sensitive funding, including
unsecured debt and some types of secured financing agreements,
may be unavailable and the terms or availability of other types
of secured financing may change.
As a result of our policy to pre-fund liquidity that we estimate
may be needed in a crisis, we hold more unencumbered securities
and larger unsecured debt balances than our businesses would
otherwise require. We believe that our liquidity is stronger
with greater balances of highly liquid unencumbered securities,
even though it increases our unsecured liabilities.
Three Months | Fiscal Year | |||||||
Ended | Ended | |||||||
February 2006 | November 2005 | |||||||
(in millions) | ||||||||
U.S. dollar-denominated
|
$ | 35,445 | $ | 35,310 | ||||
Non-U.S. dollar-denominated
|
9,318 | 11,029 | ||||||
Total Global Core Excess
|
$ | 44,763 | $ | 46,339 | ||||
| upcoming maturities of unsecured debt and letters of credit; | |
| potential buybacks of a portion of our outstanding negotiable unsecured debt; | |
| adverse changes in the terms or availability of secured funding; | |
| derivatives and other margin and collateral outflows, including those due to market moves or increased requirements; | |
| additional collateral that could be called in the event of a downgrade in our credit ratings; | |
| draws on our unfunded commitments not supported by William Street Funding Corporation (1); and | |
| upcoming cash outflows, such as tax and other large payments. |
(1) | The Global Core Excess excludes liquid assets held separately to support the William Street credit extension program. |
78
Asset-Liability Management
As of | ||||||||
February | November | |||||||
2006 | 2005 | |||||||
(in millions) | ||||||||
Mortgage whole loans and
collateralized debt obligations
(1)
|
$ | 38,697 | $ | 31,459 | ||||
Bank loans
(2)
|
17,215 | 13,843 | ||||||
High-yield securities
|
10,208 | 8,822 | ||||||
Emerging market debt securities
|
2,392 | 1,789 | ||||||
SMFG convertible preferred stock
|
4,734 | 4,058 | ||||||
Other corporate principal
investments
(3)
|
2,319 | 1,723 | ||||||
Real estate principal investments
(3)
|
686 | 745 |
(1) | Includes certain mortgage-backed interests held in QSPEs. See Note 2 to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for further information regarding our securitization activities. |
(2) | Includes funded commitments and inventory held in connection with our origination and secondary trading activities. | |
(3) | Excludes assets for which Goldman Sachs is not at risk (e.g., assets related to consolidated employee-owned merchant banking funds) of $2.09 billion and $1.93 billion as of February 2006 and November 2005, respectively. |
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80
the portion of financial instruments owned that we believe could
not be funded on a secured basis in periods of market stress,
assuming conservative loan values;
goodwill and identifiable intangible assets, property, leasehold
improvements and equipment, and other illiquid assets;
derivative and other margin and collateral requirements;
anticipated draws on our unfunded loan commitments; and
capital or other forms of financing in our regulated
subsidiaries that is in excess of their long-term financing
requirements. See Intercompany Funding
below for a further discussion of how we fund our subsidiaries.
81
Intercompany Funding
82
Crisis Planning
Cash Flows
83
84
85
risk limits based on a summary measure of market risk exposure
referred to as Value-at-Risk (VaR);
scenario analyses, stress tests and other analytical tools that
measure the potential effects on our trading net revenues of
various market events, including, but not limited to, a large
widening of credit spreads, a substantial decline in equity
markets and significant moves in selected emerging
markets; and
inventory position limits for selected business units.
VaR
Average for the | Three Months | |||||||||||||||||||||||
Three Months Ended | As of | Ended | ||||||||||||||||||||||
February | February | February | November | February 2006 | ||||||||||||||||||||
Risk Categories | 2006 | 2005 | 2006 | 2005 | High | Low | ||||||||||||||||||
Interest rates
|
$ | 40 | $ | 32 | $ | 44 | $ | 45 | $ | 46 | $ | 35 | ||||||||||||
Equity prices
|
69 | 29 | 85 | 54 | 85 | 55 | ||||||||||||||||||
Currency rates
|
18 | 15 | 30 | 10 | 30 | 9 | ||||||||||||||||||
Commodity prices
|
30 | 28 | 29 | 18 | 49 | 17 | ||||||||||||||||||
Diversification effect
(2)
|
(65 | ) | (39 | ) | (77 | ) | (44 | ) | ||||||||||||||||
Total
|
$ | 92 | $ | 65 | $ | 111 | $ | 83 | 117 | 73 | ||||||||||||||
(1) | During the first quarter of 2006, we excluded from our calculation certain equity positions generally due to their transfer restrictions or illiquidity. The effect of excluding these positions was not material to prior periods and, accordingly, such periods have not been adjusted. For a further discussion of the market risk associated with these positions, see Equity Positions below. |
(2) | Equals the difference between total VaR and the sum of the VaRs for the four risk categories. This effect arises because the four market risk categories are not perfectly correlated. |
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87
Trading Net Revenues Distribution
Other Trading Risk
88
Nontrading Risk
Derivatives
Exposure | Percentage of | |||||||||||||||
Collateral | Net of | Total Exposure | ||||||||||||||
Credit Rating Equivalent | Exposure (1) | Held | Collateral | Net of Collateral | ||||||||||||
AAA/Aaa
|
$ | 4,010 | $ | 445 | $ | 3,565 | 11 | % | ||||||||
AA/Aa2
|
9,855 | 1,935 | 7,920 | 24 | ||||||||||||
A/A2
|
11,535 | 2,513 | 9,022 | 27 | ||||||||||||
BBB/Baa2
|
10,401 | 2,868 | 7,533 | 23 | ||||||||||||
BB/Ba2 or lower
|
8,398 | 3,850 | 4,548 | 14 | ||||||||||||
Unrated
|
950 | 596 | 354 | 1 | ||||||||||||
Total
|
$ | 45,149 | $ | 12,207 | $ | 32,942 | 100 | % | ||||||||
(1) | Net of cash received pursuant to credit support agreements of $23.69 billion. |
0 - 6 | 6 - 12 | 1 - 5 | 5 - 10 | 10 Years | ||||||||||||||||||||
Credit Rating Equivalent | Months | Months | Years | Years | or Greater | Total (1) | ||||||||||||||||||
AAA/Aaa
|
$ | 420 | $ | 99 | $ | 1,454 | $ | 745 | $ | 847 | $ | 3,565 | ||||||||||||
AA/Aa2
|
1,519 | 700 | 2,027 | 2,328 | 1,346 | 7,920 | ||||||||||||||||||
A/A2
|
2,011 | 1,227 | 3,179 | 1,459 | 1,146 | 9,022 | ||||||||||||||||||
BBB/Baa2
|
1,489 | 1,179 | 2,722 | 413 | 1,730 | 7,533 | ||||||||||||||||||
BB/Ba2 or lower
|
701 | 762 | 1,863 | 639 | 583 | 4,548 | ||||||||||||||||||
Unrated
|
64 | 60 | 210 | 1 | 19 | 354 | ||||||||||||||||||
Total
|
$ | 6,204 | $ | 4,027 | $ | 11,455 | $ | 5,585 | $ | 5,671 | $ | 32,942 | ||||||||||||
0 - 6 | 6 - 12 | 1 - 5 | 5 - 10 | 10 Years | ||||||||||||||||||||
Contract Type | Months | Months | Years | Years | or Greater | Total (1) | ||||||||||||||||||
Interest rates
|
$ | 799 | $ | 315 | $ | 3,505 | $ | 3,516 | $ | 4,299 | $ | 12,434 | ||||||||||||
Currencies
|
2,420 | 377 | 2,040 | 777 | 1,067 | 6,681 | ||||||||||||||||||
Commodities
|
2,250 | 2,862 | 5,256 | 612 | 169 | 11,149 | ||||||||||||||||||
Equities
|
735 | 473 | 654 | 680 | 136 | 2,678 | ||||||||||||||||||
Total
|
$ | 6,204 | $ | 4,027 | $ | 11,455 | $ | 5,585 | $ | 5,671 | $ | 32,942 | ||||||||||||
(1) | Where we have obtained 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. |
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90
91
Total Number of | Maximum Number | |||||||||||||||
Average | Shares Purchased | of Shares That May | ||||||||||||||
Total Number | Price | as Part of Publicly | Yet Be Purchased | |||||||||||||
of Shares | Paid per | Announced Plans | Under the Plans or | |||||||||||||
Period | Purchased | Share | or Programs (3) | Programs (3) | ||||||||||||
Month #1 | 2,577,110 | (2) | $ | 127.60 | 2,487,200 | 40,226,179 | ||||||||||
(November 26, 2005 to December 30, 2005) (1) |
||||||||||||||||
Month #2
|
10,088,200 | $ | 132.34 | 10,088,200 | 30,137,979 | |||||||||||
(December 31, 2005 to January 27, 2006) |
||||||||||||||||
Month #3
|
6,464,400 | $ | 141.36 | 6,464,400 | 23,673,579 | |||||||||||
(January 28, 2006 to February 24, 2006) (1) |
||||||||||||||||
Total (1)
|
19,129,710 | $ | 134.75 | 19,039,800 | ||||||||||||
(1) | Goldman Sachs generally does not repurchase shares of its common stock as part of the repurchase program during self-imposed black-out periods, which run from the last two weeks of a fiscal quarter through the date of the earnings release for such quarter. | |
(2) | Includes 89,910 shares withheld to satisfy employee income taxes on equity-based awards granted during the period. | |
(3) | On March 21, 2000, we announced that our board of directors had approved a repurchase program, pursuant to which up to 15 million shares of our common stock may be repurchased. This repurchase program was increased by an aggregate of 160 million shares by resolutions of our board of directors adopted on June 18, 2001, March 18, 2002, November 20, 2002, January 30, 2004, January 25, 2005 and September 16, 2005. The repurchase program is intended to maintain our total shareholders equity at appropriate levels and to substantially offset increases in share count over time resulting from employee share-based compensation. The repurchase program has been effected primarily through regular open-market purchases and is influenced by, among other factors, the level of our common shareholders equity, our overall capital position, share-based awards and exercises of employee stock options, the prevailing market price of our common stock and general market conditions. The total remaining authorization under the repurchase program was 21,681,579 shares as of March 24, 2006; the repurchase program has no set expiration or termination date. |
92
Against/ | Broker | |||||||||||||||||
For | Withheld | Abstain | Non-Votes | |||||||||||||||
1. |
Election of Directors: |
|||||||||||||||||
Lloyd C. Blankfein
|
384,018,093 | 5,937,472 | * | * | ||||||||||||||
Lord Browne of Madingley
|
367,799,962 | 22,155,603 | * | * | ||||||||||||||
John H. Bryan
|
366,537,119 | 23,418,446 | * | * | ||||||||||||||
Claes Dahlbäck
|
367,161,586 | 22,793,979 | * | * | ||||||||||||||
Stephen Friedman
|
361,601,321 | 28,354,244 | * | * | ||||||||||||||
William W. George
|
369,266,555 | 20,689,010 | * | * | ||||||||||||||
James A. Johnson
|
362,714,564 | 27,241,001 | * | * | ||||||||||||||
Lois D. Juliber
|
369,450,114 | 20,505,451 | * | * | ||||||||||||||
Edward M. Liddy
|
368,619,758 | 21,335,807 | * | * | ||||||||||||||
Henry M.
Paulson, Jr.
|
381,369,589 | 8,585,976 | * | * | ||||||||||||||
Ruth J. Simmons
|
369,387,904 | 20,567,661 | * | * | ||||||||||||||
2.
|
Approval of an Amendment to The
Goldman Sachs Restricted Partner Compensation Plan
|
286,154,786 | 26,631,809 | 2,803,595 | 74,365,375 | |||||||||||||
3.
|
Ratification of the Appointment of
Independent Auditors
|
381,920,044 | 5,141,993 | 2,893,528 | * | |||||||||||||
4.
|
Shareholder Proposal Regarding
a Conflict-of-Interest Report
|
27 | 389,647,459 | 0 | * |
* | Not applicable |
93
4.1
|
Warrant Indenture, dated as of February 14, 2006, between The Goldman Sachs Group, Inc. and The Bank of New York, as trustee (incorporated by reference to Exhibit 4.34 to The Goldman Sachs Group, Inc.s Post-Effective Amendment No. 3 to Form S-3, filed on March 1, 2006). | |
10.1
|
The Goldman Sachs Amended and Restated Restricted Partner Compensation Plan. | |
12.1
|
Statement re: computation of ratios of earnings to fixed charges. | |
15.1
|
Letter re: Unaudited Interim Financial Information. | |
31.1
|
Rule 13a-14(a) Certifications. | |
32.1
|
Section 1350 Certifications. |
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95
THE GOLDMAN SACHS GROUP, INC.
By:
/s/ David A. Viniar
Name: David A. Viniar
Title: Chief Financial Officer
By:
/s/ Sarah E. Smith
Name: Sarah E. Smith
Title: Principal Accounting Officer