Goldman Sachs 2011 Annual Report A key alliance A timely turnaround A thriving community A global opportunity What does it take to make things happen? Insight, experience and strategic advice, when they’re needed most. The Goldman Sachs Business Principles Our clients’ interests always come first. We stress teamwork in everything we do. Our experience shows that if we serve our clients well, While individual creativity is always encouraged, our own success will follow. we have found that team effort often produces the best results. We have no room for those who put their Our assets are our people, capital and reputation. personal interests ahead of the interests of the firm and its clients. If any of these is ever diminished, the last is the most difficult to restore. We are dedicated to complying fully with the letter and spirit of the laws, rules and ethical The dedication of our people to the firm and the principles that govern us. Our continued success intense effort they give their jobs are greater than depends upon unswerving adherence to this standard. one finds in most other organizations. We think that this is an important part of our success. Our goal is to provide superior returns to our shareholders. We consider our size an asset that we try hard Profitability is critical to achieving superior returns, to preserve. building our capital, and attracting and keeping our best We want to be big enough to undertake the largest people. Significant employee stock ownership aligns the project that any of our clients could contemplate, yet interests of our employees and our shareholders. small enough to maintain the loyalty, the intimacy and the esprit de corps that we all treasure and that We take great pride in the professional quality contribute greatly to our success. of our work. We have an uncompromising determination to achieve We constantly strive to anticipate the rapidly excellence in everything we undertake. Though we changing needs of our clients and to develop may be involved in a wide variety and heavy volume of new services to meet those needs. activity, we would, if it came to a choice, rather be best We know that the world of finance will not stand still than biggest. and that complacency can lead to extinction. We stress creativity and imagination in We regularly receive confidential information everything we do. as part of our normal client relationships. While recognizing that the old way may still be the best To breach a confidence or to use confidential way, we constantly strive to find a better solution to information improperly or carelessly would a client’s problems. We pride ourselves on having be unthinkable. pioneered many of the practices and techniques that have become standard in the industry. Our business is highly competitive, and we aggressively seek to expand our client We make an unusual effort to identify and recruit relationships. the very best person for every job. However, we must always be fair competitors and Although our activities are measured in billions of dollars, must never denigrate other firms. we select our people one by one. In a service business, we know that without the best people, we cannot be the Integrity and honesty are at the heart best firm. of our business. We expect our people to maintain high ethical We offer our people the opportunity to move ahead standards in everything they do, both in their work more rapidly than is possible at most other places. for the firm and in their personal lives. Advancement depends on merit and we have yet to find the limits to the responsibility our best people are able to assume. For us to be successful, our men and women must reflect the diversity of the communities and cultures in which we operate. That means we must attract, retain and motivate people from many backgrounds and perspectives. Being diverse is not optional; it is what we must be. Without raising capital, how can a promising company expect to fuel essential innovation? Without managing risk, how can a business run smoothly, or an investor confidently look ahead? The answer is, they can’t. And that’s where we come in. Across the globe, our job is to help our clients succeed at critical moments. And their success benefits all of society, not in the abstract, but in the very real world. Fellow Shareholders: franchise. We finished 2011 with one of our best performances as a public company across the global league tables, ranked first in worldwide announced mergers and acquisitions (M&A), equity and equity- We began 2011 encouraged by an increase in client related offerings, common stock offerings and IPOs. activity, greater CEO confidence, and early signs that Given the strength of our client franchise across economies were on the mend, but soon after experienced global capital markets, when economies and markets new measures of macro uncertainty that ultimately improve — and we see some encouraging signs of hindered a broad-based recovery. this — we are confident Goldman Sachs will be well- Challenges facing the Euro area advanced from a positioned to provide further value to our clients and regional consideration to a global issue, leading to shareholders. As we help our clients manage through concerns about the potential for sovereign defaults, this period, we will continue to focus on their evolving contagion and growing skepticism about the willingness needs while prudently managing risk, shareholder capital of policymakers to address the situation. Not surprisingly, and expenses to generate attractive returns. the operating environment led our clients across a In this year’s letter, we would like to discuss how we variety of businesses to be materially more risk averse. are approaching the current operating environment as The firm’s perspective on managing its risk exposures well as review — through the lens of priorities articulated mirrored the sentiment of the broader market, and by our clients — the long-term growth opportunities consequently, our risk exposures remained low in 2011. for Goldman Sachs. We spent more than one-half of our Ultimately, the confluence of macro-economic concerns, time last year away from the office meeting with clients heightened market volatility, lower corporate activity around the world. Through these ongoing discussions, and decreased risk appetite among our institutional we gain a better understanding of emerging trends, clients translated into a fundamentally lower level the challenges and goals our clients are focused on and of revenue opportunities over the course of the year, the role we can play to help them. Taken individually hampering our returns. and as a whole, these interactions are fundamental to For 2011, the firm produced net revenues of our client-driven strategy. $28.81 billion with net earnings of $4.44 billion. We will also share with you the significant progress we Diluted earnings per common share were $4.51 and have made in implementing the recommendations of our our return on average common shareholders’ equity Business Standards Committee, and talk about the people was 3.7 percent for the year. Excluding the impact of Goldman Sachs, the contribution they make every day of a $1.64 billion preferred dividend associated with on behalf of our clients, and the critical role they play our redemption of the firm’s preferred stock issued in our future success. Finally, we will update you on our to Berkshire Hathaway, diluted earnings per common corporate engagement initiatives designed to help drive share were $7.46 and our return on average common job creation and growth. shareholders’ equity was 5.9 percent. Throughout the year, we continued to manage our liquidity and capital conservatively. At year-end, the firm’s Global Core The Operating Environment in 2011 Excess liquidity was $172 billion, and our Tier 1 capital While each downturn has its unique characteristics, and common ratios under Basel 1 were 13.8 percent our industry has operated through a number of economic and 12.1 percent, respectively. contractions over the past decade or so. In each instance, we saw more precipitous declines in U.S. growth While our results suffered as a consequence of global expectations than what we experienced more recently. conditions and dampened activity levels, we are pleased Nevertheless, last year’s weak economic conditions initiated to report that the firm retained its industry-leading a pullback in our clients’ strategic objectives and financing positions across our global investment banking client demands, a slowdown in market-making activities and depressed asset values across the investing spectrum. 2 Goldman Sachs 2011 Annual Report that we are being strategic in managing the firm’s financial resources for our investors. If client demand for risk capital remains muted and opportunities to invest and generate attractive returns are scarce, we may elect to reduce capital intensive portions of our balance sheet and return excess capital to shareholders through repurchases or dividends. Since the beginning of 2010, we have repurchased more than $10 billion of common stock or approximately 16 percent of our common equity relative to 2009 Gary D. Cohn Lloyd C. Blankfein year-end levels. We have also bought back the equivalent President and Chairman and of close to 80 percent of the share count issued during Chief Operating Officer Chief Executive Officer the height of the crisis, while growing our book value per common share by a compounded annual growth From a historical perspective, the reduction in our rate in excess of 9 percent since the end of 2007. At the investment banking volumes during 2011 was, in many same time, we have increased our common equity by respects, in line with the drop we experienced following nearly 70 percent over this period while maintaining the Internet bubble during 2001.