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Fellow Shareholders Fellow Shareholders: When we wrote to you last, the global economy was experiencing macroeconomic strains, punctuated by concerns over potential sovereign defaults in Europe and struggling labor and housing markets in the U.S. These concerns weighed on markets and hindered a broad-based recovery. While 2012 presented its own challenges amidst rapidly shifting investor sentiment, we are pleased to report that Goldman Sachs performed relatively well, posting solid results. This performance was the result of a competitive position defined by our deep and global client franchise, a mix of core businesses to which we have demonstrated a longstanding commitment, a healthy and strong balance sheet and the focus and enduring commitment of our people to our client-centered culture. For 2012, the firm produced net revenues of $34.2 billion, The Operating Environment in 2012 a 19 percent increase from $28.8 billion in the prior year. While the sovereign debt crisis in Europe and a weak Net earnings of $7.5 billion increased by 68 percent from recovery in the U.S. continued to persist throughout much of $4.4 billion in 2011. Diluted earnings per common share 2012, the deep uncertainty that permeated the recent past were $14.13, up more than three times from $4.51 in 2011. began to show signs of abating in the second half of the year. Our return on average common shareholders’ equity was Despite ongoing political ambiguity both in the U.S. and 10.7 percent. Book value per common share increased by Europe, generally improving economic data coupled with 11 percent during 2012, and has grown from $20.94 at the continued strong central bank actions helped stabilize end of our first year as a public company in 1999 to $144.67, corporate and investor sentiment. The European Central Bank a compounded annual growth rate of nearly 16 percent over enhanced its Long-Term Refinancing Operations to provide this period. Our capital management in 2012 reflected a term liquidity at the end of 2011, and affirmed its support for prudent approach, as our capital ratios improved significantly, the Euro. It also expressed its willingness to make outright despite returning $5.5 billion to common shareholders purchases in the secondary bond market. While the potential through share buybacks and dividends. for instability remains, these actions reduced systemic risk In this year’s letter, we would like to review the economic across Europe. In the U.S., the Federal Reserve continued to and market environment in 2012 and discuss the steps take steps to support markets and economic growth, while we have taken to differentiate Goldman Sachs across the the labor and housing markets produced encouraging signs of competitive landscape to ensure we are poised to seize upon stability and even some improvement. new opportunities as they unfold. We then will address our As corporate and investing clients digested these response to structural changes reshaping the marketplace, macroeconomic developments, activity levels increased in including regulatory change, globalization and technology. some areas and remained sluggish in others. For example, Lastly, we will provide you with an update on the important global debt issuance increased by 11 percent year over year, work taking place across our corporate engagement initiatives with high-yield issuance increasing by 38 percent. Conversely, that we believe are making a meaningful difference for global equity underwriting volumes were up only one percent many individuals and communities. and completed global mergers and acquisitions (M&A) volumes decreased by 18 percent and remained very low as a percentage of market capitalization. 2 Goldman Sachs 2012 Annual Report Gary D. Cohn Lloyd C. Blankfein President and Chairman and Chief Operating Officer Chief Executive Officer Our Competitive Position “Our focused business For Goldman Sachs, the past few years have been a period of both introspection and deliberate action, including model, global footprint a comprehensive examination of our business practices, a disciplined focus on costs and how we allocate capital and culture of teamwork- and a renewed sense of the importance of identifying the oriented professionals put difference between cyclical and secular trends. This last area is especially important to our overall strategic us in a strong position to framework. meet our clients’ needs and We never lose sight of the fact that we are stewards of an industry-leading franchise that was built over generate superior returns nearly 145 years. This means that while we have an for our shareholders.” obligation to meet the near-term demands of the current environment in which we operate, we need not completely surrender to them. Nonetheless, the cyclical pressures facing our industry are real, and we have responded by reducing costs and Our focused business model, global footprint and culture proactively managing our capital. If the environment of teamwork-oriented professionals put us in a strong deteriorates further, we will take additional action. position to meet our clients’ needs and generate superior At the same time, we will continue our investment in returns for our shareholders. In addition, durable long-term and commitment to our broad set of institutionally focused trends, such as regulation, globalization and technology, businesses that have a track record of providing higher returns will continue to have a profound effect on economies and than many other businesses within financial services. markets. And, in these areas, we have protected our ability to be proactive. We believe that providing effective advice, financing significant transactions and providing liquidity, especially in difficult markets, will be no less important going forward. Goldman Sachs 2012 Annual Report 3 Letter to Shareholders As we have often stated, our businesses do not lend In another area related to expenses, we have demonstrated themselves to predictable earnings. However, over the a strong commitment to aligning compensation with long term, we are committed to the goal of providing our performance, establishing a very close relationship shareholders with returns on equity at the top of our industry, between the firm’s revenue and compensation. In short, while continuing to grow book value and earnings per share. we compensate better in good years and have restricted pay in weaker ones. Controlling Costs A significant element of providing healthy returns is a For example, in 2011, our net revenues were down disciplined focus on expenses. Our ability to achieve 26 percent. As a result, our compensation and benefits operating leverage was particularly important in 2012 expenses were down 21 percent. In 2012, net revenues when economic growth remained challenged. rose 19 percent from the previous year and compensation and benefits expenses increased by six percent. Markets, by their construction, reflect the natural ebb and flow of economic activity, which means moving between Our approach to compensation flexibility is also periods of expansion and contraction. For this reason, it demonstrated through our compensation ratio, which has should not be surprising that in a period of contraction and averaged 39 percent over the past four years — more than uncertainty we would experience lower levels of corporate six percentage points lower than our average ratio in the and investor activity and risk appetite. four years before the financial crisis. Last year, our compensation ratio was the second lowest since we Of course, we respect cycles, which can sometimes last a became a public company. very long time. They can be so consequential that, if one does not react early enough, you not only forego the benefits of Opportunities & Our Client Franchise the cyclical upturn, but also risk the ability to recover at all. While tactical and strategic actions are always important, ultimately, our success begins and ends with our clients. With this in mind, we announced a $1.2 billion expense savings initiative with our second quarter 2011 earnings. It is only through ongoing discussions with our clients that We subsequently increased that to a run-rate of $1.9 billion we gain a better understanding of emerging trends, the in expense savings. challenges and goals that are our clients’ focus and the role we can play to help them. The opportunities we find most As part of our expense initiative, our overall headcount was attractive are invariably rooted in our fundamental strategy down nine percent over the past six quarters. At the same of integrating capital with advice to help our clients meet time, we have increased the number of people in certain their near-term needs and long-term objectives. high value locations, including Bangalore, Salt Lake City, Dallas and Singapore. Since 2007, the number of our people Like no other time in recent history, access to diversified in these locations has nearly doubled, and today represents sources of funding is becoming a strategic imperative and 23 percent of the firm’s population. is driving the further development of capital markets in many parts of the world. Roughly 70 percent of all corporate We also have focused on closing certain businesses that funding in the U.S. comes from capital markets activity; in are not core, have lower returns and/or impose excessive Europe, the situation is nearly the opposite, with the bulk capital charges. For example, we sold our hedge fund of funding coming from bank loans. administration business, which provides various accounting and processing
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