Strategic Report for Goldman Sachs Group, Inc. Tom Church Meredyth Lacy Cameron Taylor April 22, 2009 Goldman Sachs Group, Inc. Table of Contents EXECUTIVE SUMMARY .......................................................................................................................... 3 COMPANY OVERVIEW............................................................................................................................ 4 COMPANY HISTORY.................................................................................................................................... 4 BUSINESS OVERVIEW ................................................................................................................................. 8 Investment Banking............................................................................................................................... 8 Trading and Principal Investments....................................................................................................... 8 Asset Management and Securities Services .......................................................................................... 9 COMPETITIVE ANALYSIS .................................................................................................................... 10 RIVALRY .................................................................................................................................................. 10 Investment Banking............................................................................................................................. 10 Trading and Principal Investments..................................................................................................... 10 Asset Management and Securities Services ........................................................................................ 10 BUYER POWER.......................................................................................................................................... 11 SUPPLIER POWER ...................................................................................................................................... 11 BARRIERS TO ENTRY ................................................................................................................................12 Investment Banking............................................................................................................................. 12 Trading and Principal Investments..................................................................................................... 12 Asset Management and Securities Services ........................................................................................ 13 SUBSTITUTES............................................................................................................................................ 13 Investment Banking............................................................................................................................. 13 Trading and Principal Investments..................................................................................................... 14 Asset Management and Securities Services ........................................................................................ 14 COMPLEMENTS......................................................................................................................................... 14 SWOT.......................................................................................................................................................... 15 STRENGTHS .............................................................................................................................................. 15 WEAKNESSES ........................................................................................................................................... 18 OPPORTUNITIES ........................................................................................................................................ 18 THREATS .................................................................................................................................................. 19 FINANCIAL ANALYSIS .......................................................................................................................... 20 OVERVIEW................................................................................................................................................ 20 PROFITABILITY AND GROWTH .................................................................................................................. 21 SOLVENCY................................................................................................................................................ 22 LIQUIDITY ................................................................................................................................................ 25 STRATEGIC RECOMMENDATIONS................................................................................................... 26 LEVERAGE................................................................................................................................................ 26 REGULATION ............................................................................................................................................ 28 Troubled Asset Relief Program - TARP.............................................................................................. 28 Term Asset-Backed Securities Loan Facility - TALF.......................................................................... 28 Temporary Liquidity Guarantee Program – TLGP ............................................................................ 28 COMPENSATION........................................................................................................................................ 30 POTENTIAL FOR GROWTH......................................................................................................................... 33 Brazil – Banco Pactual ....................................................................................................................... 33 Eastern Europe – UniCredit Group.................................................................................................... 34 ENDNOTES................................................................................................................................................ 37 April 22, 2009 Page 2 Goldman Sachs Group, Inc. Executive Summary Goldman Sachs Group, Inc. (“GS,” “Goldman Sachs,” “Goldman,” or “the firm”) is arguably the world’s leading financial services institution. The firm has best-in-class operations in its investment banking, trading and principal investments, and asset management and securities services divisions. The current financial crisis has created a difficult environment for all investment banks, including Goldman Sachs, whose profitability slumped in fiscal year 2008 before rebounding in Q1 2009. Despite the crisis, however, the firm has continued to outperform its peers, further validating its reputation for superior risk management. Goldman’s relative success notwithstanding, the investment banking industry is undergoing a period of deep self-evaluation, and structural fundamental shifts may be underway. Questions raised include: • Leverage: Macroeconomic headwinds and investor uncertainty have necessitated rapid deleveraging across the industry, which raises broad questions about the sustainable future level of leverage for investment banks. • Regulatory reform: Government capital injections into large financial institutions are accompanied by the prospect of extensive regulatory reform. Public fury over financial institutions deemed “too big to fail” is at a fever pitch. For systemically important institutions, the government may make specific demands. More generally, legislative and regulatory changes may undermine the current business models of the largest investment banks. • Compensation: Mainstream opinion has accepted that compensation at least partially caused the type of risk-taking that led to the financial crisis. The question now becomes whether public firms will be allowed to make their own reforms or if the government will legislate compensation change. At stake is the very human capital which makes the large investment banks valuable. • Competitive landscape: The elimination of weaker firms has left a vacuum. The business model of the large investment banks will compete with the boutique model over that market share. Goldman is better-positioned to weather the storm than most or all of its peers. The firm must decide where aggression is appropriate and where caution is the optimal strategy. April 22, 2009 Page 3 Goldman Sachs Group, Inc. Company Overview Company History The long history of Goldman Sachs Group dates back to 1869, when German immigrant Marcus Goldman moved to New York and began buying customers' promissory notes from jewelers to resell to banks for a profit. Goldman's son-in-law, Samuel Sachs, joined the business in 1882, followed by Goldman's son Henry and son-in-law Ludwig Dreyfus in 1885. That year, the firm became a general partnership as Goldman, Sachs & Co. In 1887, Goldman Sachs formed a relationship with the British merchant bank Kleinwort Sons and began offering US-UK foreign exchange and currency services. Having established a presence in the northeast, the firm expanded its operations